The Australian dollar remains firm on soft consumer inflation expectations

• AUD/USD is higher following remarks from former RBA Governor Bernie Fraser.
• Bernie Fraser criticized the RBA board for focusing too much on inflation at the expense of the labor market.
• Australian consumer inflation expectations fell to 4.4% in September, down slightly from August’s peak of 4.5%.

AUD/USD gains ground following weak consumer inflation expectations in Australia released on Thursday. In addition, former Governor of the Reserve Bank of Australia (RBA), Bernie Fraser, criticized the current RBA board for focusing too much on inflation at the expense of the labor market. Fraser suggested the Council should cut the cash rate, warning of “recession risks” that could have serious consequences for employment.

The Australian dollar (AUD) gained support against the US dollar (USD) as risk sentiment improved following the release of the US inflation report on Wednesday. US consumer price index (CPI) data for August showed headline inflation fell to a three-year low, although core inflation beat expectations. This development has increased the likelihood that the Federal Reserve (Fed) will begin its easing cycle with a 25 basis point interest rate cut in September.

On Wednesday, Reserve Bank of Australia (RBA) deputy governor for economics Sarah Hunter noted that high interest rates are suppressing demand, which is expected to lead to a mild economic recession. Hunter also pointed out that the labor market remains tight relative to employment levels, with employment growth expected to continue, albeit slower than population growth, according to Reuters.

Daily Digest Market Movers: Australian dollar holds ground as risk sentiment improves

• According to the CME FedWatch tool, markets fully anticipate a rate cut of at least 25 basis points (bps) by the Federal Reserve at its September meeting. The probability of a 50 bps rate cut fell sharply to 15.0%, down from 44.0% a week ago.
• Australian consumer inflation expectations fell to 4.4% in September, down slightly from August’s peak of 4.5%. This decline highlights the central bank’s efforts to strike a balance between reducing inflation within a reasonable timeframe and maintaining gains in the labor market.
• The US consumer price index fell to 2.5% from a year earlier in August, from the previous reading of 2.9%. The index fell below the expected value of 2.6%. Meanwhile, headline CPI was 0.2% on the month.
• Core US CPI, excluding food and energy, was unchanged at 3.2% y-o-y. On a monthly basis, the core CPI rose to 0.3% from the previous reading of 0.2%.
• The first US presidential debate between former President Donald Trump and Democratic nominee Kamala Harris of Pennsylvania has been won by Harris, according to a CNN poll. The debate began with a critical focus on the economy, inflation and economic policies.
• Morgan Stanley’s chief economist Robin Xing said China is undoubtedly facing deflation, probably in the second stage of the process. Xing noted that Japan’s experience suggests that the longer deflation persists, the greater the need for China to implement significant stimulus measures to overcome the challenge of debt deflation, according to Business Standard.
• Australia’s Westpac consumer confidence fell 0.5% month-on-month in September, swinging from a 2.8% rise in August.
• China’s trade balance reported a trade surplus of CNY 649.34 billion for August, up from the previous reading of CNY 601.90 billion. Meanwhile, China’s exports (CNY) rose 8.4% year-on-year, following a previous increase of 6.5%.

Technical analysis: Australian dollar moves above 0.6650; the next barrier at the nine-day EMA

AUD/USD is trading near 0.6680 on Thursday, with technical analysis on the daily chart indicating that it remains in a descending channel, signaling a bearish trend. The 14-day Relative Strength Index (RSI) remains below the 50 level, confirming the ongoing bearish trend.

On the downside, AUD/USD could target the lower limit of the descending channel around 0.6600. A break below this level may strengthen the bearish outlook, potentially leading the pair to the support area for a pullback near 0.6575.

On the other hand, the AUD/USD pair may face resistance around the nine-day EMA at 0.6694, followed by the upper limit of the descending channel near 0.6720. A break above this upper limit could dampen the bearish trend, potentially opening the door for the pair to retest its seven-month high of 0.6798, last seen on July 11.

AUD/USD: Daily chart