USD Rebounds Amid Fed Commentary, AUD Eyes Potential Rate Hike

USD Outlook

The US dollar made a comeback yesterday, reversing its earlier declines. This recovery was largely driven by statements from Federal Reserve Governor Michelle Bowman, which balanced out the comments made by other Fed officials earlier in the week. Bowman highlighted the ongoing uncertainty in the inflation outlook, suggesting that a rate cut this year is premature. Her hawkish stance underscores her expectation that inflation will "remain elevated for some time."

USDIndex H4

 Source: Finlogix ChartsGovernor Bowman's annual vote on the Federal Open Market Committee (FOMC) gives her position considerable influence. Her consistent hawkish tone was anticipated given her previous views. She remains one of the four FOMC members opposed to rate cuts this year, reiterating a well-known position.

In contrast, Governor Lisa Cook offered a more balanced perspective. She acknowledged the need for a rate cut "at some point" while expressing caution due to her belief that inflation would stabilize "sideways" throughout the year. Cook also predicted more significant declines in inflation next year, aligning with the potential for rate cuts.

The varying views among Fed officials highlight two key points: the diverse opinions within the FOMC on the pace of inflation decline and the significant impact of economic data on market movements. Recent market reactions to CPI data and shifts in the FOMC's rate cut projections illustrate this dynamic, with yields falling despite hawkish signals.

This week is expected to be one of consolidation, with major movements anticipated next week following key economic data releases, including the PCE inflation data and the Non-Farm Payroll (NFP) report. 

The NFP data will be particularly crucial, especially given Fed President Mary Daly's comments about potential "inflection points" in the labour market, indicating increased risks of downside surprises.

In the meantime, the US dollar could see further gains, particularly if the weekend's political developments align with market expectations. However, significant movement will depend on next week's data, especially regarding labour market conditions.

AUD Outlook

Australia's latest inflation data has raised concerns for the Reserve Bank of Australia (RBA), potentially leading to a rate hike at its next meeting on August 6. The year-over-year CPI for May increased from 3.6% to 4.0%, and the trimmed mean measure rose from 4.1% to 4.4%, both surpassing expectations. This data has driven up the 2-year government bond yield and heightened market expectations for a potential rate hike.

Australia Inflation 

 Source: Finlogix Economic CalendarAt the last policy meeting on June 18, RBA Governor Michelle Bullock indicated a leaning towards a rate hike, though he also noted the restrictive nature of current monetary policy and weak economic data as balancing factors. The latest inflation figures, however, make it difficult for the RBA to ignore the case for a rate increase.

The timing of this data is critical, coinciding with planned fiscal stimulus from the government. Governor Lowe has emphasized the need for more comprehensive inflation information before making a final decision. With no RBA meeting in July, the next key data point will be the Q2 CPI release on July 31. Should economic activity data remain weak, and the Q2 CPI disappoint, the RBA might delay action. However, given the current inflation trends, a delay seems less likely.

From an FX perspective, this scenario supports higher yields and suggests a gradual upward movement for AUD/USD.

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