Hot CPI fails to hold AUDUSD above key level

Australian CPI released today surprised to the upside coming in at 6.8% y/y , well above the consensus of 6.4% which itself was  an increase on March’s figure of 6.3%

Coming into the figure futures markets had priced in a measly 2.5% chance of a hike next week by the RBA, that changed dramatically with odds jumping to 18.8% for a 25bp hike according to cash rate futures traders.

Initial reaction in AUDUSD was predictable, with a sharp spike to the upside as markets repriced the RBA odds, this has quickly retraced though and AUDUSD has now breached the major support at 0.6500.

While this move in AUDUSD might seem unexpected, the main driver of this pair for a while now has been risk sentiment, poor global risk sentiment = AUDUSD down, rather than the actions of the RBA.

The optimism from what was seen as a “done deal” on the US debt ceiling has soured somewhat as the deal does not look so “done” as squabbling in various factions of the Republican and Democrat parties threaten to derail it. We can see this in equity markets having a rough ride, with US futures pointing to a gap down in their cash session later today.

What next for AUDUSD?

Having broken the 0.6500 level, the next real support from a chartist view is the next big figure at 0.64 where we had a lot of chop and support/resistance switching places in late 2022.

Whether we test that or not I believe will depend on debt ceiling progress this week, USD is likely to remain well bid while risk appetite is shaky purely on safe haven flows, cyclical currencies like AUD, NZD and GBP to a lesser extent will all struggle in this environment. If we do get a confirmed deal this week(i.e. voted successfully through Congress), then those haven flows should unwind seeing AUDUSD rally if risk appetite returns to the market.