0.7050: Australian Dollar stays above level as hot CPI strengthens RBA rate hike bets

• 0.40% gain for AUD/USD follows the Fed’s decision to leave interest rates unchanged.
• 3.7% Australian trimmed mean CPI reinforces expectations of additional RBA tightening.
• 85% probability of a December Fed rate hike precedes US PCE and GDP releases.

AUD/USD gains 0.40% on Wednesday. The advance follows the Federal Reserve’s decision to keep rates unchanged, with the pair trading at 0.7053. Fed Chair Kevin Warsh signalled that “officials had made clear our readiness to act as circumstances require, and we have shown our willingness to act.”

November tightening case lifts AUD/USD as Australian inflation offsets Warsh’s hawkish tone

Markets absorbed the Fed’s rate decision and Warsh’s comments without disruption as the week’s main event concluded. A hold had been anticipated in money markets. During the press conference, Warsh reiterated the committee’s resolve to bring inflation back to the Fed’s 2% target.

Although Warsh said policy tightening was taking effect, he stopped short of describing financial conditions as tight. Rejecting the idea of a “soft inflation target”, he confirmed that the price stability objective is 2%, measured by Personal Consumption Expenditures (PCE).

In its earlier monetary policy statement, the Fed acknowledged robust economic activity and said labour market gains “have kept pace with the workforce,”. It also noted elevated inflation but said further data would be needed to determine the appropriate policy stance.

There were no other scheduled releases beyond the Fed decision. According to Prime Terminal, swaps pricing assigned an 85% probability to a 0.25% rate increase in December.

September’s Australian Trimmed Mean CPI increased by 3.7% YoY, compared with 3.5% previously, reinforcing the argument for a further rate rise. Following the release, Reserve Bank of Australia (RBA) Deputy Governor Hauser said that “inflation is too high.”

A November rate increase of 25 basis points is expected by ANZ analysts. In a note, they also said they “expect to see upward revisions to the RBA’s inflation forecasts which will be published in the November SMP.”

US data dominate the calendar

Australia has no scheduled releases. By contrast, a full US calendar includes Core PCE, the Fed’s preferred inflation gauge, alongside Gross Domestic Product (GDP) data and jobless claims.

AUD/USD Price Forecast: Technical assessment