Australian Dollar declines to near 0.7150 as hot US inflation data boost case for Fed rate hike

The AUD/USD pair edges lower to around 0.7160 during the early Asian session on Monday. Stronger-than-expected US inflation reports provide some support to the US Dollar (USD) against the Australian Dollar (AUD). All eyes will be on the US Federal Reserve (Fed) interest rate decision on Wednesday. 

The US Consumer Price Index (CPI) rose 0.4% MoM in August, putting the 12-month increase at 3.4%, the Bureau of Labor Statistics reported Friday. Both readings were in line with the Dow Jones consensus. 

The core CPI, which excludes volatile food and energy prices, increased by 0.3% on a monthly basis, compared to the market consensus of 0.2%, and 2.4% on a yearly basis, down slightly from 2.5% in July.

The CPI inflation data followed strong readings in several components of the Producer Price Index (PPI) released on Thursday, raising the specter of a Fed interest rate hike next week and supporting the Greenback. 

Financial markets initially priced in an 86.2% odds of a quarter-point rate hike at the Fed's September meeting, up from 72% before the CPI data, according to CME's FedWatch tool. 

A hawkish tone from the Reserve Bank of Australia (RBA) might help limit the Aussie’s losses. RBA Assistant Governor Sarah Hunter said on Tuesday that the central bank may need to raise interest rates again if inflation proves more persistent than expected, keeping alive the prospect of another hike at its September meeting. 

Aussie slides as UOB flags growing downside risks in AUD/USD

Strategists at UOB Group note that their medium-term stance on AUD/USD remains intact, even as price action has turned sharply lower. They recall that since last Friday, when spot was at 0.7205, their view was that the Aussie “could edge higher, but any advance is likely to stay within a 0.7160/0.7240 range.” After the pair “edg[ed] higher for several days and reach[ed] a high of 0.7238 two days ago,” UOB highlights that AUD then “plunged and closed 0.83% lower at 0.7157 yesterday.”

The bank stresses that this “rapid increase in downward momentum indicates that AUD could decline toward 0.7120,” marking a shift toward a more bearish near-term bias. However, UOB also cautions that if AUD were to break above “0.7210 (‘strong resistance’ level), it would mean that it is likely to continue to trade in a range,” keeping the broader 0.7160–0.7240 consolidation scenario in play over the next one to three weeks.

Technical Analysis: AUD/USD

In the daily chart, AUD/USD holds above the 100-day moving average (MA) and the lower Bollinger Band, suggesting a constructive near-term tone, while price is testing the area just under the middle Bollinger band. The Relative Strength Index (14) at 54 leans slightly positive, hinting that buyers retain control but without overstretched momentum.

On the topside, immediate resistance emerges at the middle Bollinger band at 0.7170, followed by the upper band near 0.7235, where upside attempts could begin to stall. On the downside, initial support is located at the lower Bollinger band around 0.7100, ahead of the 100-day MA at 0.7080, a break of which would weaken the bullish bias and expose deeper retracements.