Australian Dollar bounces off weekly low vs USD ahead of US PCE; not out of the woods yet

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The AUD/USD pair shows some resilience below the 0.7100 mark and recovers a few pips following an intraday slide to a one-week low, touched earlier this Thursday. Spot prices trade around the 0.7120 region during the first half of the European session, still down for the second straight day.

AUD/USD attracts sellers for the second straight day amid a combination of negative factors.
Reduced RBA rate hike bets continue to undermine the Aussie and exert pressure on the pair.
Fresh Iran escalation and hawkish Fed bets lift the USD, contributing to the intraday downfall.

Data released on Wednesday showed that the headline Australian Consumer Price Index (CPI) slowed from the 4.6% YoY rate in March to 4.2% in April. This comes on top of an unexpected rise in the Australian Unemployment Rate and a fall in the number of employed people, prompting traders to nearly price out the possibility of an interest rate hike by the Reserve Bank of Australia (RBA) at the June RBA policy meeting. This, in turn, undermines the Australian Dollar (AUD), which, along with a firmer US Dollar (USD) continues to exert downward pressure on the AUD/USD pair.

The latest developments surrounding the Middle East crisis temper hopes for a diplomatic solution to end a three-month-old Iran war and benefit the USD's reserve currency status. US forces carried out ‌new strikes in Iran targeting a military site that posed a threat to US forces and commercial traffic in the Strait of Hormuz. Moreover, Iran’s Islamic Revolutionary Guard Corps (IRGC) said it targeted the US airbase in response to an attack near Bandar Abbas airport and warned that any further US attacks would trigger 'a more decisive' response, raising the risk of a further escalation of tensions.

Meanwhile, US President Donald Trump said that he is not satisfied with the terms of the deal negotiated with Iran and that he won’t be rushed into a deal. This keeps geopolitical risk premium in play and continues to support the Greenback. Apart from this, bets that the US Federal Reserve (Fed) will raise interest rates by the end of this year turn out to be another factor acting as a tailwind for the USD and weighing on the AUD/USD pair. The USD bulls, however, seem hesitant and opt to wait for the release of the US Personal Consumption Expenditures (PCE) Price Index report.

The core reading is seen as the Fed's preferred inflation gauge and will play a key role in influencing market expectations about the central bank's policy path. Thursday's US economic docket also features the release of the Preliminary Q1 GDP print, which could further drive the USD demand and provide a fresh impetus to the AUD/USD pair. Apart from this, the market focus will remain glued to developments surrounding the Middle East conflict. Nevertheless, the fundamental backdrop seems tilted in favor of bearish traders and backs the case for further depreciation for the pair.

Economic Indicator

Core Personal Consumption Expenditures - Price Index (YoY)

The Core Personal Consumption Expenditures (PCE), released by the US Bureau of Economic Analysis on a monthly basis, measures the changes in the prices of goods and services purchased by consumers in the United States (US). The PCE Price Index is also the Federal Reserve’s (Fed) preferred gauge of inflation. The YoY reading compares the prices of goods in the reference month to the same month a year earlier. The core reading excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures." Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.

Why it matters to traders?

After publishing the GDP report, the US Bureau of Economic Analysis releases the Personal Consumption Expenditures (PCE) Price Index data alongside the monthly changes in Personal Spending and Personal Income. FOMC policymakers use the annual Core PCE Price Index, which excludes volatile food and energy prices, as their primary gauge of inflation. A stronger-than-expected reading could help the USD outperform its rivals as it would hint at a possible hawkish shift in the Fed’s forward guidance and vice versa.