The AUD/USD pair continues to trade in a narrow price range, moving around the level of 0.7750. A half-empty economic calendar does not contribute to increased volatility. In addition, the USD bulls stood still in anticipation of key events that will determine the further direction of the US currency. Tomorrow, America will publish basic data on inflation growth, and a week later (June 16), the results of the next Fed meeting will be announced. Ahead of these events, traders of dollar pairs do not risk opening large positions, and the AUD/USD pair is no exception.
During the Asian session on Wednesday, the Australian dollar showed a negative trend, although limited. This currency reacted minimally to the controversial data release on inflation in China. According to preliminary forecasts, China's consumer price index was supposed to rise by 1.6% in May, but the indicator came out at around 1.3%. And although it was released in the "red zone", it cannot be called disappointing: the CPI has been growing consistently over the past three months. On the contrary, the producer price index published today exceeded the forecasted values, reaching the 9% mark (with a growth forecast to 8.5%). This indicator has been consistently growing for the past 5 months, reflecting the recovery processes in the country.
In this case, we can talk about a limited impact on the AUD/USD. The Australian dollar "formally" reacted to the above figures, but it regained its lost positions at the end of the Asian session without leaving the flat range. It is obvious that before tomorrow's release, traders will be extremely cautious, as US inflation may "redraw" the fundamental picture for the pair.
It can be recalled that the irregular growth of US inflation has raised the issue of the early winding down of QE again. The "hawkish" mood prevailed among traders during the first half of May, and this fact allowed the US dollar to strengthen its position against a basket of major currencies. The May release was really surprising. The overall consumer price index, with a forecast of growth to 3.6% (from the March value of 2.6%), was at 4.2%, significantly exceeding the Fed's target level. In monthly terms, the indicator also came out in the green zone, reaching 0.8%, although experts expected it to slow down to 0.2%. The indicator has consistently increased for the fourth month in a row, being at the highest level since the spring of 2016. As for annual terms, the core CPI (excluding food and energy) surged to 3%, with growth forecast to reach 2.3%.
In response to these values, many Fed representatives noted that the regulator will not take any retaliatory action based on just one single release. But some members of the Fed (in particular, Daly and Brainard) still made "hawkish" decisions provided that inflation indicators continue to show similar dynamics.
That is the reason why tomorrow's publication plays such an important role in the context of the US dollar's future prospects. If the CPI shows a strong result again, the "hawkish" rumors will only increase and the dollar will be in high demand (at least within the framework of the "buy on rumors" trading principle). Otherwise, it will be under the pressure of doubts, especially amid the "dovish" rhetoric from the majority of Fed representatives. In turn, the Australian dollar will follow its American counterpart since it has no fundamental arguments of its own.
Based on preliminary forecasts, the consumer price index will slow down its growth on a monthly basis. The general CPI is expected to come out at around 0.4% (m/m), after rising to 0.8% in April. In this case, the indicator will interrupt its sequential growth, which lasted for five months. The core consumer price index should also show similar dynamics. In annual terms, a mirror situation is expected – both the general CPI and the core indices may update their multi-year records, rising to 4.7% and 3.4%, respectively.
In my opinion, the US dollar will receive significant support only if all the components of tomorrow's release are released in the "green zone". In all other cases, the possible growth of the US currency may be unreliable, especially before the Fed's June meeting.
Given this fundamental disposition, it is advisable to currently stay out of the market. It is difficult to predict the reaction of the market to tomorrow's release, especially if the numbers show contradictory dynamics. In addition, false price movements that are inherent in such situations are not excluded.
