AUD/USD Breaks Below Key Support as US Producer Price Data Boosts Fed Hike Bets

The Australian dollar (AUD) came under pressure on Friday after the US dollar gained strength following producer price data that hinted at a potential interest rate hike by the Federal Reserve next week.

The Labor Department's report showed that producer prices increased in August, which has boosted expectations of a Fed rate hike and put downward pressure on the AUD/USD pair. The pair had been trading within an ascending channel above its 200-day moving average but broke below it after the US data release.

Market participants are now focusing on the upcoming consumer price index (CPI) report, which is expected to show core inflation rising by 0.2% in August, taking the annual rate to 3.4%. A surprise increase in CPI could further strengthen the case for a Fed rate hike and lead to fresh selling in the AUD/USD pair.

The market now prices in a 71% chance of a September rate hike by the Federal Reserve, up from around 60% before the producer price data release. The Reserve Bank of Australia (RBA) has also narrowed its interest rate expectations with the Fed, following Fed Chairman Kevin Warsh's hawkish address at Jackson Hole and hotter-than-expected labor market data.

The AUD/USD pair could face further selling pressure if the US CPI report confirms persistent inflationary pressures. If the pair breaks below the 0.7120 support level, it may trigger a deeper retracement towards this area.