AUD/USD falls on weak inflation data as gold rises ahead of Fed

<p>AUD/USD plunged early on Wednesday after Australian inflation data in the form of the Consumer Price Index for the third quarter showed a lower-than-expected increase […]</p>

AUD/USD plunged early on Wednesday after Australian inflation data in the form of the Consumer Price Index for the third quarter showed a lower-than-expected increase of 0.5% versus prior expectations of 0.7%. The implications of low inflation potentially heighten the prospects of yet another interest rate cut by the Reserve Bank of Australia (RBA). The central bank has already cut the cash rate target twice this year. Next Tuesday, the RBA will announce its cash rate and release a rate statement. In the event of a rate cut or any substantial hint of an impending rate cut as a partial result of the low inflation data, the Australian dollar could clearly have significantly more room to fall.

Of course, adding onto this pressure on AUD/USD is Wednesday’s impending FOMC statement from the US. While the markets deem it highly unlikely that any rate hike will occur today, the statement itself could have significant market-moving potential as investors speculate on the wording of the statement as it relates to the timing of a future rate hike.

In the meantime, gold, which usually holds a correlation with the Australian dollar, has rebounded sharply ahead of the Fed’s policy statement. This gold surge occurs as the US dollar has pulled back modestly on Wednesday morning.

AUD/USD Daily Chart

 

From a technical perspective, AUD/USD has finally broken down decisively below the 0.7200 prior support level after having consolidated above that level for more than the past two weeks. In the process, the currency pair has hit a three-week low around its 50-day moving average and comes closer to re-approaching September’s six-year low around 0.6900.

From a longer-term view, AUD/USD continues to be deeply entrenched within a sharp downtrend that has been in place for well more than a year. The directional bias remains firmly to the downside. If the currency pair continues to trade under 0.7200, the next major downside targets are at the 0.7000 psychological level followed by the 0.6800 support objective.

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