The Australian Dollar has fallen against the US Dollar for three consecutive days. This decline comes after the US released inflation data that dampened hopes for an interest rate cut by the Federal Reserve anytime soon. The US Consumer Price Index (CPI) rose by 0.3% in June, surpassing the expected 0.2% and the previous annual rate of 2.4%. This is the fastest increase since January and suggests ongoing inflation despite the Fed’s efforts to tighten policies. As a result, expectations for a rate cut in September have shifted.

US Dollar Index and Global Impact

The US Dollar Index climbed to 98.70, the highest level in three weeks, affecting currencies like the Australian Dollar amidst global trade tensions. A strong dollar makes risk-sensitive currencies, including the Aussie Dollar, less attractive. Following the CPI report, former President Trump called for immediate rate cuts, highlighting the potential for significant savings on debt servicing. Political pressure is rising as inflation remains above the 2% target, leading to expectations of gradual policy easing in the coming months. A table provided displays the performance of the AUD against other currencies, emphasizing its relative strength against the Japanese Yen. The heat map shows percentage changes of major currencies, indicating that the Australian Dollar has weakened against the US Dollar.

The Fed’s Policy Shift

The latest inflation data is more than just a statistic; it marks a change in direction. Hopes for an easy interest rate cut in September from the Federal Reserve have faded. This is evident in the Fed fund futures market, where the likelihood of a September cut has dropped from over 80% just a few weeks ago to around 55-60%. This adjustment is driving the dollar’s rise, putting pressure on the Aussie. To navigate this landscape, we need to recognize this policy divergence. While the US economy shows strength, highlighted by a remarkable jobs report that added 272,000 positions, Australia faces its own hurdles. Inflation in Australia remains high, with the latest monthly CPI showing a year-over-year increase of 4.0%. However, the key difference lies in economic momentum and external challenges, such as the price of iron ore, Australia’s main export. It struggles to stay above $105 per tonne, a sharp decline from its previous highs. This limits the Aussie’s strength, unlike the US dollar. Given this scenario, there’s a strong case for bearish positions on the AUD/USD pair. The best way to express this view is by buying put options. This strategy allows for defined-risk exposure while enabling us to profit from a potential drop towards the year-to-date lows near 0.6400 without risking significant losses if market sentiment suddenly changes. Political pressure from figures like Trump for rate cuts could heighten volatility, making options more appealing if timed effectively. Historically, this environment is challenging for the Aussie. Looking back at previous Fed tightening cycles, like in 2018, a strong dollar and a resolute Fed pushed the AUD/USD down for months. Although the data highlights the Aussie’s strength against the Japanese Yen, this is due to different factors, specifically carry trade dynamics in response to the ultra-dovish stance of the Bank of Japan. The main focus now is clear: we are using the renewed strength of the US dollar to challenge currencies with weaker fundamentals. Create your live VT Markets account and start trading now.

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