The Australian dollar faced significant selling pressure against the US dollar, which mounted a powerful rebound. This shift came as core inflation in Australia climbed to its highest level in nearly two years, reigniting concerns about potential interest rate hikes.

Key Fundamental Drivers

1. Australia's May CPI: Mixed Bag of Headline Easing and Core Pressure

Data released on June 24th showed Australia's Consumer Price Index fell 0.7% month-on-month in May, with the annual inflation rate dropping to 4.0% from 4.2% in April, below the market forecast of 4.3%. However, the core measure, the trimmed mean inflation rate, rose 0.4% for the month, exceeding expectations. The annual rate for this key indicator increased from 3.4% to 3.6%, also above the anticipated 3.5%. This rise in underlying inflation pressures is moving further away from the Reserve Bank of Australia's 2-3% target band. While falling fuel prices contributed to the softer headline figure, persistent cost pressures in housing, with new dwelling costs recording their largest monthly rise since December 2022, remain a concern. Following the data, money markets priced in roughly a two-thirds probability of another rate hike by December.

2. US New Home Sales Unexpectedly Decline in May

Data showed sales of new single-family homes in the US unexpectedly fell in May. The seasonally adjusted annual rate was 580,000 units, down 7.3% from the previous year. The median sales price held steady at approximately $424,900. The weakness is attributed to the dual burden of high prices and rising mortgage rates, which have climbed due to higher bond yields and inflation expectations, worsening affordability for potential buyers and suppressing demand.

3. US Q1 Current Account Deficit Widens More Than Expected

The US current account deficit widened to $226.8 billion in the first quarter, exceeding forecasts. The primary driver was a sharp deterioration in the primary income balance, which swung from a surplus to a deficit. This offset an improvement in the goods trade deficit. While the deficit's expansion as a share of GDP is modest and the dollar's reserve currency status limits immediate currency impact, it reflects an ongoing evolution in the US external liability position.

Market attention on June 25th will focus on Australian employment data in the morning and the US core PCE price index along with weekly jobless claims in the evening.

Economic and Policy Analysis

Australia's May inflation data presented a policy conundrum for the central bank. While headline inflation eased to 4% year-on-year, the RBA's preferred core measure accelerated to 3.6%, its highest annual pace in recent quarters. The RBA has already raised rates three times since February, reversing its 2025 easing and holding the cash rate at 4.35%. Economists are divided on the next move. Some warn that persistent core inflation above target could necessitate another hike in 2026, while others point to falling oil prices and a softening economy as reasons the bank may hold steady in August. The Australian dollar fell 1.2% against the US dollar, pressured by a broad US dollar rally driven by safe-haven flows and heightened expectations for Federal Reserve rate hikes.

Domestic Housing Market Developments

The Federal Housing Minister acknowledged the housing market is undergoing a correction but denied the government's proposed tax reforms on negative gearing and capital gains were the primary cause. With national auction clearance rates dropping below 50%, major banks have revised down their price growth forecasts. The government argues its reforms aim to rebalance the market in favor of first-home buyers, though significant improvements in affordability are not expected before the next election. The opposition maintains that increasing housing supply is the ultimate solution for price stability.

Market Performance and Geopolitical Context

The Australian share market, as measured by the ASX 200, edged higher by 0.2% to close at 8808, ending a four-day losing streak. Gains were broad-based across sectors like tech services and healthcare, though weakness in energy and mining stocks capped the advance. Geopolitically, a preliminary US-Iran agreement aimed at ending the conflict in the Middle East faces regional skepticism and challenges from Israel, while Ukrainian drone strikes targeted Russian energy infrastructure. These developments contributed to oil prices falling to pre-conflict lows.

Technical Outlook for AUD/USD

The Australian dollar continued its weakening trend against the US dollar on Wednesday. A brief bounce following the domestic CPI data was overwhelmed by broad US dollar strength, which hit a 13-month high on reinforced expectations for Federal Reserve tightening. From a technical perspective, the AUD/USD pair maintains a bearish structure on the four-hour chart, trading within the lower half of the Bollinger Bands with the RSI in oversold territory. Key support is identified around the 0.6840 level. A break below this could open the path toward 0.6780. Immediate resistance sits near 0.6920, with a break above potentially leading to a corrective bounce toward 0.6980. The pair is caught between domestic rate hike expectations and a dominant US dollar, likely maintaining a weak and volatile bias in the near term, with upcoming US PCE data and Australian jobs figures serving as critical catalysts.

The suggested short-term trading range is between 0.6920 and 0.6840, with potential extension levels at 0.6980 on the upside and 0.6780 on the downside. Proper capital and risk management remain paramount for traders.

Please note that the above analysis is for informational purposes only. Investing carries risks, and individuals should exercise caution.