Asia Day Ahead: Risk sentiments stabilise, Australia’s inflation surprises on the downside

Asia Open

The Asian session was met with a slightly positive open, with Nikkei +0.44%, ASX +0.30% and KOSPI +0.05% at the time of writing, as risk sentiments attempt to stabilise following recent profit-taking. This comes as major US indices drifted lower overnight, with some caution kicking in ahead of the key US core Personal Consumption Expenditures (PCE) price index release on Friday.

At the recent Federal Reserve (Fed) meeting, policymakers have revealed some tolerance for slightly higher inflation, suggesting that it may have to take a significant upside surprise in the inflation read to sway the Fed’s view of keeping to three rate cuts through 2024. For now, consensus is for the core PCE price index to stay unchanged at 2.8% year-on-year, while the headline read may edge slightly higher to 2.5% from previous 2.4%, which may continue to leave market participants eyeing a potential rate cut as early as June.

Treasury yields were largely subdued, coming off a promising 5-year Treasury auction overnight, and not providing much of a cue for the equities market. The Nikkei 225 continues to hang just less than 2% from its month-to-date high, while the Hang Seng Index (HSI) attempts to stabilise at a time of the year where its seasonality turns more favourable. Notably, the Straits Times Index (STI) is seeking to challenge its year-to-date high in today’s session, with any move above the 3,260 level of resistance boding well for a continuation of the near-term upward trend.

Economic data to digest: Australia’s inflation

The economic calendar today leaves Australia’s monthly inflation data in focus, and with the Reserve Bank of Australia (RBA) dropping its tightening bias at its previous meeting, the inflation data today provided some justification for its decision. The monthly consumer price index (CPI) indicator has stayed unchanged at 3.4% for the third straight month, with market participants finding some comfort that it is lower than the 3.5% consensus and that pricing pressures are still broadly under control.

That anchored views for impending rate cuts from the central bank in the months ahead, likely in its August meeting, with the odds of any earlier rate move revolving around the Fed’s June meeting outcome.

What to watch: AUD/USD struggles on lower-than-expected inflation

The AUD/USD reacted to the downside in today’s session, with the pair back to retest an upward trendline support at around the 0.652 level, after an earlier attempt to rebound this week was quickly stopped short by its 200-day moving average (MA). For now, the near-term bearish bias may remain, with its daily relative strength index (RSI) failing to reclaim its key 50 level, while its daily moving average convergence divergence (MACD) is also eyeing for a cross into negative territory. Ahead, any breakdown of the near-term trendline support may pave the way for the pair to retest the 0.645 level next while on the upside, its 200-day MA at the 0.656 level will prove to be a heavy resistance to overcome.