The Australian dollar has stabilized on Thursday. In the North American session, AUD/USD is trading at 0.6524, up 0.19%. The Aussie plunged 1.75% a day earlier after US inflation accelerated and beat expectations.

Fed expected to delay rate cut after hot US CPI

US inflation has hit a bump, as March CPI accelerated to 3.5% y/y, up from 3.2% and above the market estimate of 3.4%. This is the second straight month that inflation has risen and is raising concerns that the Federal Reserve will delay lowering interest rates.

The markets have responded by slashing the odds of a rate cut in the upcoming meetings. A June cut is off the table and the odds of a July cut have dropped to 41%, down from 81% just one week ago. The Fed will understandably be reluctant to lower rates with inflation moving higher and the economy posting strong data such as last week’s blowout nonfarm payrolls.

Australian inflation expectations rise

In Australia, consumer inflation expectations rose to 4.6% in April, up from 4.3% in March and beating the forecast of 4.1%. This was the highest level since November and reflected sticky services inflation. Australia’s economy has been sluggish and GDP fell to 0.2% in the fourth quarter, the weakest print in five quarters. The slowdown in China has been a key reason why the Australian economy is struggling, as China is Australia’s largest trading partner.

China’s CPI indicates deflation

China is grappling with deflation, a worrying sign of a weak economy. March CPI fell 1% m/m, after a 1% gain in February. This was lower than the market estimate of -0.5% and the lowest inflation rate in three years. On an annualized basis, inflation dropped to just 0.1%, down from 0.7% in February and shy of the market estimate of 0.4%.

China didn’t get any love from Fitch Ratings, which downgraded the country’s credit outlook to negative this week. Fitch highlighted China’s large fiscal deficits and rising government debt, although it did not lower China’s credit rating of A+.

AUD/USD Technical

• AUD/USD tested resistance at 0.6548 earlier. Above, there is resistance at 0.6596
• 0.6464 and 0.6416 are the next support levels

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