Australian Dollar languishes around 0.6900 with US inflation data in the spotlight

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The Australian Dollar (AUD) remains stuck near two-month lows against the US Dollar (USD) on Thursday, consolidating losses after plummeting about 2.5% in an eight-day losing streak.

AUD/USD is struggling to take off from seven-month lows at 0.6885, following a 2.5% drop in the last eight days.
The US Dollar consolidates near mid-term highs on Thursday as investors await US PCE inflation data.
Australian Unemployment rate declined in May amid higher-than-expected employment creation.

The Australian Dollar (AUD) remains stuck near two-month lows against the US Dollar (USD) on Thursday, consolidating losses after plummeting about 2.5% in an eight-day losing streak. The positive Australian employment figures have failed to support the pair, with investors wary of selling the USD ahead of the US Personal Consumption Expenditures (PCE) Price Index figures, due later on the day.

The US Federal Reserve's (Fed) inflation gauge of choice is expected to show that price pressures accelerated further in May, adding to the case of an interest rate hike later this year. Headline PCE inflation is seen accelerating to a three-year high of 4.1%, from 3.8% un April, with the core reading ticking up tp 3.4% in the 12 months to May, from 3.3% in the previous month.

Markets are pricing a Fed rate hike in October

Data from the CME Fed Watch Tool shows that futures markets are pricing above 30% chances of a quarter-point rate hike next month, up from 17% one month ago, while the odds for a hike in September have risen to 65% from 40% last month. This is underpinning support for the US Dollar.

In the Geopolitical front, comments from US officials show optimism about a swift end to the conflict, although the uncertainty about the status of the Strait of Hormuz and Iran’s nuclear program remains high, keeping investors cautious and risk-sensitive assets, like the AUD, subdued so far.

Against this background, the positive Australian employment data released earlier on the day has passed practically unnoticed. The Unemployment Rate declined to 4.4% in May from 4.5% in April, amid a 40.3K increase in net employment, beating market expectations of a 25K rise and reversing the 40.7K April drop.

These figures back the Reserve Bank of Australia’s forecasts, hinting at a tighter labour market in the coming months and leaving the door open to further interest rates if inflationary pressures remain above target.

Economic Indicator

Personal Consumption Expenditures - Price Index (YoY)

The 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 YoY reading compares prices in the reference month to a year earlier. Price changes may cause consumers to switch from buying one good to another and the PCE Deflator can account for such substitutions. This makes it the preferred measure of inflation for the Federal Reserve. Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.

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.