The Australian Dollar has remained consistently strong against the US Dollar, currently trading around 0.6511. Traders are trying to find their way through the haze of mixed economic signals being thrown off the wall by the U.S. Australia. In Australia, recent data showing softer-than-expected inflation figures weighed on the AUD in the short term, resulting in mixed feelings from traders. At the same time, the S&P Global Flash Composite Purchasing Managers’ Index (PMI) suggested developing growth momentum, adding to a mixed economic picture.
Very unexpectedly, in October the S&P Global Flash Composite PMI rocketed up to 54.8. This is up from 53.9 in September, signaling an overall increase in economic activity. The final Consumer Sentiment Index took a notable downward revision in its final reading. It came in at 53.6, a further drop from the first estimate of 55.0. With a number of other contrasting data points this has left traders on the sidelines, looking toward what this could mean for future monetary policy.
Inflation Dynamics
Inflation expectations turned out to be a mixed bag, adding to recreating the already tricky outlook for traders. On the one-year horizon, the inflation outlook held stable at 4.6%, a sign of stability in short-term expectations. The five-year measure increased from 3.7% to 3.9%, indicating an increase in fears about longer-term inflationary pressures.
On an annual basis, the consumer price index increased by 3.0%, below the expected 3.1%. This suggests that while inflation is indeed an issue, it might not be rising as fast as once worried. That the CPI, released every quarter, is one of the biggest drivers of market perceptions isn’t in dispute. This has a huge impact on how traders value the AUD.
And sticking with inflation, the trimmed mean—the Fed’s preferred measure of underlying inflation—continues to be a key input for traders. As Federal Reserve expectations shift, these metrics will begin to shape the monetary policy decisions of the Federal Reserve. This move would have a huge impact on AUD/USD exchange rates.
Market Sentiment and PMI Data
The Services PMI had a healthy boost, leaping to 55.2, pointing to positive growth in that sector. The Manufacturing PMI ticked up a bit to 52.2, still showing some moderate expansion. The numbers paint a picture of a wary, yet optimistic outlook on the economic climate in America. This would provide at least a short-term backstop for the USD.
For all the backs and forths in sentiments, the AUD/USD remains anchored to a relatively narrow band of 0.6480 to 0.6520. Near term support is at 0.6480, followed by resistance at 0.6535. This kind of ultra-narrow trading ranges illustrate the market’s nervous indecision while traders look for clearer signals about what happens next in the economy.
The US Dollar Index (DXY) is just barely above 99.00. This dynamic brings new nuances to the currency pair’s bullish and bearish moves. All of these indices and economic indicators have had a tremendous impact on setting the current AUD/USD trajectory. In the near term, this influence seems set to continue.
Future Outlook
As traders assess the latest economic data releases, they remain vigilant for indications of how these factors might influence central bank policies moving forward. These conflicting cues from inflation expectations and consumer sentiment are incredibly important factors for market participants to consider.
The risk-sensitive AUD/USD has held up remarkably well lately even as the softer inflation data weighed on the currency. Rather than over-reacting, traders are opting to take a wait and see approach. The narrow prevailing trading range shows the trade-off between the warring economic narratives, a balance that would change with each consequential data release going forward.