AUD Surges as US Dollar Weakness Overpowers Soft Inflation Data

The Australian Dollar (AUD) gained strength on Thursday as the US Dollar (USD) weakened in response to the Federal Reserve's (Fed) decision to leave interest rates unchanged. The AUD/USD pair traded around 0.7010, up 0.82% on the day.

The initial drop in the AUD was attributed to softer Australian inflation data, with the Consumer Price Index (CPI) slowing to 3.8% YoY in June from 4% previously. However, this negative impact was outweighed by the broader USD weakness.

The Fed's decision to maintain interest rates at 3.5%-3.75% was seen as dovish, despite persistent inflation concerns. The US economy expanded at an annualized rate of 1.5% in the second quarter, missing market expectations of 2.1%. Inflation data also supported the idea that disinflation is ongoing in the United States.

The AUD continued to gain strength as markets questioned the need for additional monetary tightening. The Reserve Bank of Australia (RBA) had been expected to raise interest rates in August, but market pricing dropped from nearly 21% to around 3%-4% after the softer inflation reading.