Australian Dollar treads water above 0.6900, amid the risk-off market mood

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The Australian Dollar (AUD) posts moderate gains against the US Dollar on Tuesday, bouncing to the 0.6930 area from session lows near 0.6910.

AUD/USD bounces up from 0.6910 but remains capped below 0.6950 so far.
The risk-off market mood has offset the impact of positive Australian and Chinese figures.
The focus on Tuesday is on the US CPI release and Fed Warsh's testimony before Congress.

The Australian Dollar (AUD) posts moderate gains against the US Dollar on Tuesday, bouncing to the 0.6930 area from session lows near 0.6910. The AUD/USD pair, however, remains wavering within recent ranges, as a risk-off market mood has offset the impact of the improvement in Australian consumer confidence.

The Aussie Dollar picked up during Tuesday’s Asian session as the Westpac Consumer Sentiment Index showed a 4.1% improvement, to 83.9 in July, from 80.6 in June. This is still a comparatively low figure, hinting at an overall pessimistic stance yet with easing concerns about fuel prices and rate hikes.

Apart from that, foreign trade data from China beat expectations, with a USD 125.62 billion surplus in June from USD 105.43 billion in May, as a 27% increase in exports offset the 36% rise in imports. China is Australia’s main trading partner, and these figures tend to have a significant impact on the Aussie.

Geopolitical tensions are weighing on Aussie's recovery

Tensions in the Middle East, however, remain simmering, dampening investors’ mood and acting as a headwind for the risk-sensitive AUD. US and Iran exchanged attacks for the sixth consecutive time on Monday, and the US military blocked the transit of Iranian Vessels through the Strait of Hormuz.

US President Donald Trump offered protection for tankers trying to cross the waterway for a 20% fee, which contributed to sending oil prices to nearly one-month highs, and further fuelled inflationary pressures.

Against this background, investors will keep an eye on June’s US Consumer Price Index (CPI) figures, which are expected to have remained at levels well above the Federal Reserve’s (Fed) 2% target. These figures are likely to frame Fed Chairman Kevin Warsh's testimony before the US Congress, which is due later on the day.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.