As inflation slows, the Australian currency declines in early trade

26 Jul 2023 , 12:08 PM

The Australian dollar fell on Wednesday as investors substantially increased the probability of an interest rate hike next week as a result of an unexpectedly low inflation figure, which also sparked a rally in bonds.

The Australian dollar fell 0.7% to $0.6742, erasing gains gained the previous day on expectations of additional Chinese stimulus. Resistance is located near $0.6845, with support at $0.6715. The kiwi dollar declined in response, falling 0.4% to $0.6197.

Consumer prices increased 0.8% in the June quarter, below expectations of 1.0% and the lowest increase since the third quarter of 2021, according to Australian data. Again falling short of expectations, core inflation’s annual rate fell to 6.0% from 6.6%.

As bottlenecks in global supply chains cleared throughout the quarter, the inflation of goods prices dropped significantly, but the greatest increase in service prices since 2001 disappointed.

Markets reduced their expectations that the Reserve Bank of Australia (RBA), which had suspended hiking interest rates at 4.1% in July, would start doing so at its policy meeting on August 1. This was due to the slowdown in the headline indicators.

Futures currently indicate a 28% possibility of a quarter point increase to 4.35%, down from a 52% chance prior to the data. Rates’ anticipated peak decreased from 4.45% to 4.30%.

While 10-year bond yields decreased to 4.03%, three-year bond futures increased 6 ticks to 96.100.

What the U.S. Federal Reserve decides to do and say later on Wednesday will also have an impact on the outlook. Although a quarter point rate increase has already been factored into the market, any indication that this could be the cycle’s final increase would relieve pressure on other central banks to continue tightening.

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