AUD/USD recovers towards 0.6970s post high US PCE, but remains down

• AUD/USD fell from multi-week highs around 0.7031 and tumbled on risk-off impulse in the FX markets.
• Fed’s Bostic said that the Fed needs to do more in terms of interest rates while saying the US is not in a recession.
• The Fed’s favorite inflation gauge gives the green light for another rate hike.

The Australian dollar slides vs. the greenback, after hitting a daily high at 0.7031 but higher than estimated US inflation figures, triggered a U-turn in the FX space, with safe-haven peers leading the pack. At the time of writing, the AUD/USD is trading at 0.6976.

AUD/USD falls on risk-off impulse in the FX markets after a high PCE reading

The AUD/USD is trading below its opening price as investors reassess the Fed decision. On Wednesday, bulls were everywhere, with global equities rallying as if the Federal Reserve paused or cut rates. The Fed indeed acknowledged that production and spending “softened” but did not signal that they would pause.

In fact, on Friday, the Atlanta Fed President Raphael Bostic said that he is convinced that the Fed is “going to have to do more in terms of interest-rate moves.” Bostic said he does not think the country is in a recession after Thursday’s weaker than estimated Advanced GDP for the second quarter at -0.9%.

In the meantime, US inflation figures reported earlier reinforced what Bostic said. The Personal Consumption Expenditure (PCE), the Fed’s favorite gauge for inflation, rose 1% MoM and is up 6.8% YoY vs. estimations of 6.7%. The so-called core PCE, which extracts volatile items, increased from 4.7% foreseen to 4.8% YoY.

Therefore, the AUD/USD reaction to the headline pushed the pair downwards towards its daily low at 0.6911, 100 pips from its highs, though it has bounced back and is approaching its opening price. In the meantime, the US Dollar Index remains negative in the day, down 0.13%, sitting at 106.074.

Elsewhere, US President Joe Biden and his counterpart, Chinese President Xi Jinping, had a face-to-face meeting and directed teams to follow up. The lifting of tariffs on China’s products was not discussed, as they focused on Taiwan.

Another reason that would cap the AUD/USD gains is that China’s foreign trade is facing higher risks, according to China’s Commerce Minister. He added that the second-half trade growth is not optimistic.

Earlier in the Asian session, the Australian docket featured the Producer Price Index for the Q2 on its annual reading, increasing by 5.6%, more than the 4.9% estimated, giving enough ammunition to the Reserve Bank of Australia to continue hiking rates.

What to watch

Next week, the US economic docket will feature S&P Global and ISM Manufacturing PMIs for July on its final reading. The Australian calendar will unveil the Reserve Bank of Australia (RBA), Interest Rate Decision, where the bank is expected to hike 50 bps from 1.35% to 1.85%.

AUD/USD Key Technical Levels