Can the Australian Dollar hold above 0.7050 as hot CPI strengthens RBA hike bets?

• AUD/USD gains 0.40% following the Fed’s decision to leave interest rates unchanged.
• Expectations of further RBA tightening strengthen as Australian trimmed mean CPI picks up to 3.7%.
• Ahead of US PCE and GDP releases, the probability of a December Fed rate hike rises to 85%.

AUD/USD edges up 0.40% on Wednesday to trade at 0.7053, following the Federal Reserve’s decision to keep interest rates on hold. Fed Chair Kevin Warsh, meanwhile, signalled that “officials had made clear our readiness to act as circumstances require, and we have shown our willingness to act.”

Can Australian inflation sustain AUD/USD gains as November tightening expectations build despite Warsh’s hawkish stance?

Financial markets took the Fed’s decision and Warsh’s comments in their stride as the week’s main event concluded. With money markets having anticipated unchanged rates, attention turned to the press conference, where Warsh reiterated the committee’s resolve to bring inflation down to the Fed’s 2% target.

While describing policy tightening as effective, Warsh stopped short of saying financial conditions were tight. He ruled out a “soft inflation target”, reiterating that the price stability objective is 2%, measured by Personal Consumption Expenditures (PCE).

In its earlier monetary policy statement, the Fed acknowledged strong economic activity and said labour market gains “have kept pace with the workforce,” while noting that inflation remained high. It would await additional data before judging the appropriate policy stance.

There were no other scheduled releases apart from the Fed’s decision. According to Prime Terminal, swaps markets were pricing in an 85% probability of a 0.25% rate increase in December.

The case for another Australian rate hike strengthened after September’s Trimmed Mean CPI rose to 3.7% YoY from 3.5%. Following the release, Reserve Bank of Australia (RBA) Deputy Governor Hauser remarked that “inflation is too high.”

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

Which economic releases are due next?

With no releases on Australia’s calendar, attention turns to a busy US schedule. Due for release are the Fed’s preferred inflation gauge, Core PCE, alongside Gross Domestic Product (GDP) data and jobless claims.

AUD/USD Price Forecast: What does the technical outlook show?