Aussie eyes Australian inflation expectations, Aussie higher

The Australian dollar continues to hover around the 0.66 level and close to three-week highs. In the European session, AUD/USD is trading at 0.6604, up 0.30% on the day.

Inflation expectations expected to remain at 3.9%

The Reserve Bank of Australia will be keeping a close eye on Thursday's consumer inflation expectations, which is expected to remain unchanged in September at 3.9%. Inflation expectations fell in August to 3.9% from 4.7%, the lowest level since March.

With inflation largely under control, the Reserve Bank has continued its easing cycle, lowering rates in August to 3.6%, the lowest level since April 2023. At the meeting, the RBA signaled that it would continue to cut rates as the inflation was easing and the labor market had cooled.

China's inflation points lower

China continues to grapple with deflation. Consumer inflation in August declined 0.4% y/y, down from 0% in July and lower than the market estimate of -0.2%. Monthly, CPI was flat, down from 0.4% in July and below the market estimate of 0.1%. The Producer Price Index fell 2.9% y/y, following a 3.6% decline and in line with the market estimate.

Deflation in China reflects decreased demand, which could spell trouble for Australia, as China is its largest trading partner.

The Federal Reserve is widely expected to lower rates at next week's meeting, even though inflation is around 3%, above the Fed's target of 2%. The US releases August consumer inflation on Thursday, with headline CPI expected to rise to 2.9% from 2.7% and the core rate projected to remain unchanged at 3.1%. The inflation report is unlikely to change any minds at the Fed about a September cut, but could change market expectations about one further rate cut before the end of the year.

• AUD/USD has pushed above resistance at 0.6590 and is testing 0.6610. Next, there is resistance at 0.6635
• 0.6570 and 0.6555 are the next support levels