• The Australian Dollar weakens ahead of the first fully expanded Australian inflation dataset.
• Expectations of a cautious stance from the Australian central bank limit the Aussie’s downside.
• The US Dollar remains under pressure amid strengthening bets on a December Fed rate cut.

AUD/USD trades around 0.6450 on Tuesday, down 0.30% on the day at the time of writing. The pair pulls back after two consecutive days of gains as traders adopt a more cautious tone ahead of Wednesday’s release of Australia’s fully expanded Consumer Price Index (CPI). The Reserve Bank of Australia (RBA) does not yet place significant weight on this revamped series, with market participants focusing instead on developments in housing and services inflation for clearer signals on underlying price pressures.

The downside in AUD/USD remains limited, however, as the US Dollar (USD) continues to soften. Expectations of a rate cut by the Federal Reserve (Fed) in December have strengthened significantly, fuelled by a series of dovish-leaning comments from policymakers. According to the CME FedWatch tool, markets now price an 81% chance of a 25-basis-point rate cut in December, up from 71% the previous day.

Federal Reserve Governor Christopher Waller said on Monday that the weakening labour market is now his main concern, noting that inflation is “not a big problem” given recent softness in employment data. He also suggested that the September payrolls figure is likely to be revised lower, pointing to a labour market that is becoming increasingly concentrated and fragile.

The latest ADP data confirm that picture. Private employers reportedly shed an average of 13,500 jobs per week during the four weeks ending November 8, illustrating a gradual loss of momentum in the US economy. ADP’s chief economist highlighted that consumer strength “remains in question” heading into the holiday hiring season.

Producer Price Index (PPI) data added to the evidence of mild disinflation. Headline PPI rose 2.7% YoY, in line with expectations, while core PPI slowed to 2.6%. On a monthly basis, headline PPI printed at 0.3%, and core PPI at 0.1%, both considered benign readings by market standards.

US Retail Sales for September also disappointed with a 0.2% monthly increase versus the 0.4% expected, reinforcing expectations of softer fourth-quarter growth.

The Conference Board’s Consumer Confidence Index fell sharply to 88.7 in November from 95.5 previously, signalling a clear deterioration in household sentiment. Chief Economist Dana Peterson noted that all five components of the index weakened, with the labour market differential declining again and expectations becoming “notably more pessimistic.”

These developments have strengthened the case for monetary easing, as several Fed officials, including Stephen Miran, now explicitly argue that the economy “calls for large rate cuts”, emphasising that rising unemployment reflects monetary policy that has become “too tight.”