AUD/USD in the Balance: RBA and US CPI Set to Decide

The Australian dollar has been on a winning streak for six weeks but faces an important test from the Reserve Bank of Australia (RBA) and US Consumer Price Index (CPI). The RBA's tone could shape expectations for a potential hike, but few expect one in the near term. A weak CPI print could undermine Fed hike expectations and give the Aussie room to push higher, while a hotter result could support the US dollar and limit gains around 71c.

US jobs growth contracted as hiring weakened, with nonfarm payrolls falling 23k, its first contraction in six months, missing the 85k estimate. This has lowered expectations for a September Fed rate hike to 57%, from 54% before the NFP release. The US dollar was broadly lower on Friday and is now seen as the weakest FX major, forming a bearish engulfing candle and weakest close in two months.

Markets have priced out a near-term RBA hike following softer Q2 inflation, but the RBA's tone could still influence expectations for a potential hike. Inflation remains firmer than the RBA would like, above its target band, forcing it to retain a hawkish bias. However, unless crude oil prices rise due to another Middle East conflict, the RBA's cash rate may have peaked at 4.35%.