- AUD/JPY hovers in a narrow trading band for the third consecutive day on Tuesday.
- Traders are choosing to stay on the sidelines ahead of Australian CPI and BoJ on Wednesday.
- Bets on a BoJ rate cut and a softer risk tone benefit the safe-haven JPY and limit upside.
The AUD/JPY pair struggles to gain significant traction during Tuesday’s Asian session and remains confined in a three-day range, well above a three-month low touched last week. Spot prices are currently trading around the 100.85 region, almost unchanged on the day, as traders eagerly await this week’s important macroeconomic data and central bank event risks before opening fresh directional positions.
Australia’s quarterly consumer inflation report is due out on Wednesday, which could influence the Reserve Bank of Australia’s (RBA) next policy move and move the Australian Dollar (AUD). In addition to this, official Chinese PMI figures will play a key role in providing some significant impetus to the Australian Dollar, a proxy for China. However, the focus remains on the crucial policy decision by the Bank of Japan (BoJ), which should determine the near-term trajectory of the AUD/JPY cross.
Meanwhile, expectations that the Japanese central bank might hike interest rates again on Wednesday could continue to act as a tailwind for the Japanese Yen (JPY). The bets were reaffirmed by data indicating that core inflation in Tokyo, Japan’s national capital, continued its upward trend for the third consecutive month in July. Adding to this, a softer risk tone benefits the JPY’s safe-haven status and limits the upside of the AUD/JPY cross amid China’s economic woes.
From a technical perspective, the recent range-bound price action could still be categorized as a bearish consolidation phase amid the overbought Relative Strength Index (RSI) on the daily chart. Moreover, the lack of buying interest suggests that the path of least resistance for the AUD/JPY pair is to the downside. That said, it would still be prudent to wait for acceptance below the 200-day Simple Moving Average (SMA) before positioning for an extension of the recent downtrend.
Inflation FAQs
Inflation measures the rise in prices of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change month-on-month and year-on-year. Core inflation excludes more volatile items such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure that economists focus on and is the target level for central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change month-on-month and year-on-year. The core CPI is the target for central banks as it excludes the volatility of food and fuel. When the core CPI exceeds 2%, interest rates typically rise, and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually translates into a stronger currency. The opposite is true when inflation falls.
Although it may seem counterintuitive, high inflation in a country drives up the value of its currency and vice versa in the case of lower inflation. This is because the central bank will typically raise interest rates to combat higher inflation, which attracts more global capital inflows from investors looking for a lucrative place to park their money.
Gold was once the go-to asset for investors during times of high inflation because it preserved its value, and while investors often still buy Gold for its safe haven properties during times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks raise interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity cost of holding Gold versus an interest-bearing asset or putting the money in a cash deposit account. Conversely, lower inflation tends to be positive for Gold as it lowers interest rates, making the shiny metal a more viable investment alternative.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
