Australian Dollar struggles to recover against US Dollar as hawkish Fed bets escalate

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The Australian Dollar (AUD) is under pressure against the US Dollar (USD) as traders have raised bets supporting interest rate hikes by the Federal Reserve this year, with the AUD/USD pair posting a fresh almost eight-week low at around 0.7025.

The Australian Dollar trades close to an almost eight-week low of 0.7025 against the US Dollar.
Traders raise hawkish Fed bets following strong US NFP data for May.
Investors await China’s Trade Balance and the US CPI data for May.

Hawkish Fed bets have accelerated following the release of the surprisingly strong United States (US) Nonfarm Payroll (NFP) data for May.

On Friday, the US NFP report showed that the economy created 172K fresh jobs, significantly higher than 85K estimates. Meanwhile, the April reading was also revised higher to 179K from 115K.

The CME FedWatch tool shows that the possibility of the Fed delivering at least one interest rate hike this year has increased to 73.8% from 45.2% seen a week ago.

Hawkish Fed bets have already accelerated in the past few months as energy prices elevated due to the Middle East crisis. Before the onset of the US-Israel war with Iran, traders had anticipated two interest rate cuts by the Fed this year.

For more cues on the US interest rate outlook, investors will focus on the Consumer Price Index (CPI) data for May, which will be released on Wednesday. The US headline is seen higher at 4.2% Year-on-Year (YoY) from 3.8% in April.

In Australia, investors await China’s Trade Balance data for May, which will be released on Tuesday. China’s trade data will impact the Aussie Dollar, given that the Australian economy relies heavily on its exports to Beijing.

Economic Indicator

Consumer Price Index (YoY)

Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as The Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier.The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.

Why it matters to traders?

The US Federal Reserve (Fed) has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% YoY and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.