The Australian dollar slipped 0.13% to about 0.7210 against the US dollar in European trading on Tuesday as the greenback turned positive after an early dip. The US Dollar Index (DXY) was 0.1% higher near 99.00, with markets focused on the US Consumer Price Index (CPI) for August due on Friday. TD Securities expects core CPI to rise 0.19% m/m and 2.3% y/y, while headline CPI is seen at 0.37% m/m and 3.4% y/y, driven by energy and firmer food prices; its assumptions include large falls in tariff-exposed categories such as apparel and household goods.
Federal Reserve officials have pointed to improving inflation readings while keeping August data central to next month’s interest-rate decision, with commentary also flagging the potential for policy tightening if inflation surprises. In Australia, attention turns to Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser’s ABC interview. On the charts, AUD/USD traded at 0.7209, holding above the 20-day EMA at 0.7150, while the 14-day RSI sat around 66; initial support remains near 0.7150, with a break opening scope for a pullback towards mid-0.71 areas.
Market Volatility Ahead of Key CPI Data
As we watch the Australian Dollar pull back slightly to around 0.7210 against a firmer US Dollar, derivative traders should prepare for increased volatility. The US Dollar Index has ticked up toward the 99.00 level, showing that the greenback is regaining some ground ahead of crucial inflation data. Historically, similar currency consolidations ahead of major economic releases lead to a brief squeeze in liquidity, making tight spreads hard to find.
The upcoming US Consumer Price Index report on Friday is the main event, with core inflation expected to rise by 0.19% month-on-month. In previous quarters, when actual core CPI deviated from estimates by just 0.1%, we saw AUD/USD swing by an average of 75 pips within the first hour of the release. We recommend using straddles or strangles to capture this expected volatility without having to pick a direction beforehand.
Policy Divergence and Trading Strategies
Federal Reserve officials have indicated that a hot inflation print could revive discussions of a rate hike, while the Reserve Bank of Australia maintains its own hawkish tone. This policy divergence means that interest rate futures are pricing in a wider swing than usual for the coming weeks. We suggest hedging existing long AUD positions using short-term put options to protect against a US dollar surge.
Technically, the pair remains in a bullish trend as long as it holds above the 20-day Exponential Moving Average at 0.7150. However, a breakdown below 0.7150 could quickly open the door for a slide back to the 0.7100 support zone. We believe traders should set tight stop-losses on long futures positions to prevent heavy losses if this support breaks.
