Of all the G10 pairs, the AUD/USD has been the most stunningly resilient. It stays firm above the 0.6600 level and is near breaking above a nearly two-month high set just yesterday. Combined with recent inflation data, there are clear signs of a cooling US economy and a continuing softening labor market. Traders are intensely focused on next week’s US consumer inflation report for clues. Recent macroeconomic data has renewed hopes for a near-term interest rate cut by the Federal Reserve. This potential change has the ability to greatly alter the competitive landscape in the markets.
A recent blog post from the Brookings Institution indicates that the USD has been weak for too long, despite diverging global macroeconomic signals. Analysts are focused on any potential YoY readings. For the cost-of-goods index, these readings measure how much more or less it currently costs to purchase all the same goods as the previous July. Inflation is a moving target. Traders are understandably cautious in viewing these economic indicators as constraining any efforts to reverse the recent weakness in the USD.
Economic Indicators Point to Cooling
The latest macro data out of the United States indicates that the economy continues to cool slowly but surely. This trend is further reflected in the softening labor market. After all, economic growth seems to be softening, leading some market participants to fret over what may come from the Fed’s monetary picture down the road. This information is critical since it helps set the stage for what we might expect from interest rates and inflation.
Specifically, a number of officials from the Federal Reserve have hinted that one more interest rate reduction this coming December is very likely. CME traders are pricing in an almost 90% chance that the central bank will reduce borrowing costs by 25 basis points (bps) next week. Consequently, the mood on market is turning. The tide of least resistance on spot prices is starting to look like it’s flowing in the direction of increasing.
The interplay between inflation metrics and labor market performance will play a crucial role in determining the future trajectory of monetary policy. If persistent price pressures emerge, they could compel the Fed to reconsider its approach, potentially affecting both the USD and other currency pairs.
AUD/USD Pair in Bullish Consolidation
During the Asian session on Friday, the AUD/USD pair started a bullish consolidation phase. Oscillating either side of the 0.6600 round figure, the pair continues to sit just under its recent high watermark. This consolidation is indicative of traders’ glaring cautious optimism as they watch and wait for potentially market shaking inflation data out of the United States.
Bulls in the crypto market are definitely looking forward to this highly-anticipated US inflation report. Some argue a positive result might prolong the AUD/USD pair’s fresh two-week-old uptrend. Market participants have one eye nervously watching any change in sentiment that may be the result of next week’s significant economic data.
Traders are especially focused on what inflation numbers will mean for the Federal Reserve’s decision-making. The nation’s central bank is laser-focused on the most recent inflation figures. If the FOMC sees evidence of persistent price pressure, it should be prepared to tighten monetary policy.
Implications for Future Monetary Policy
The implications of the October CPI release reach farther than just the next day’s trading strategy. As analysts note, should price pressures turn out to be persistent, it would have major implications for the path of monetary policy going forward. This uncertainty leads to a very difficult market for traders as they are forced to react to their positions.
The USD’s recent weakness has added a layer of complexity to this situation, preventing any rebound from finding its footing. As traders assess their approach going forward, they need to consider these macroeconomic elements in comparison with technical signals for pairs such as AUD/USD.