AUD/USD: Hot CPI Data Fueling Speculation of Early Rate Hike

The Australian and New Zealand Dollars are edging higher on Wednesday as the commodity-linked currencies try to recover from a beat down earlier in the week. The Aussie is currently hovering just above a two-month low, while the Kiwi is coming off its lowest level this year.

The Aussie Dollar is also getting a boost from higher-than-expected inflation data that tightened the chances of an earlier than expected Reserve Bank of Australia (RBA) rate hike.

At 11:21 GMT, the AUD/USD is trading .7148, up 0.0023 or +0.33%. The NZD/USD is at .6584, up 0.0020 or +0.30%. On Tuesday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $70.96, down $0.14 or -0.20%.

Australian Dollar Gets Minor Lift from Major Inflation Shock

The Australian Dollar got a much-needed lift on Wednesday as data showed inflation blew past all expectations last quarter, narrowing the odds on a rate rise as early as next week, according to Reuters.

Gains are being limited as investors have already priced in a whole series of rate hikes from the RBA. Furthermore, most of the attention has turned toward Chinese COVID lockdowns and dropping demand for high-yielding assets.

Australian Inflation Hits 20-Year High Putting May Rate Hike on Table

Australian consumer prices surged at the fastest annual pace in two decades last quarter as gasoline, home building and food costs all climbed, fueling speculation interest rates could rise from record lows as soon as next week.

Wednesday’s data showed the consumer price index (CPI) jumped 2.1% in the first quarter, topping market forecasts of a 1.7% increase. The annual pace picked up to 5.1%, from 3.5% the previous quarter and the highest since 2001.

A closely watched measure of core inflation, the trimmed mean, hit a record 1.4% in the quarter, taking the annual pace to the highest level since early 2009 at 3.7%.

That was the first time since 2010 that core inflation had lifted above the Reserve Bank of Australia’s (RBA) 2-3% target band, a radical turnaround from recent years when it consistently undershot.

Short-Term Outlook

The AUD/USD is likely to be underpinned most of the session on Wednesday as the CPI data bolstered a growing view that the RBA no longer needs to keep interest rates at emergency lows of 0.1% and should tighten soon, perhaps even at its next policy meeting on May 3 rather than in June.

Today’s early strength is likely being fueled by short-covering since real buyers are nervous about the Fed’s plan to rapidly increase interest rates and the lower demand for commodities and even riskier stocks. Therefore, we expect any short-term gains to be capped until the AUD/USD can build a solid support base.