AUD/USD drops sharply to 0.6740 as US Dollar steadies ahead of US retail sales

• AUD/USD drops near 0.6740 as US Dollar gains ground following Fed’s Powell speech.
• Fed’s Powell reiterated the need for more good inflation data to cut interest rates.
• Investors are awaiting US retail sales and Australian employment data.

The AUD/USD pair fell sharply to 0.6740 in the European session on Tuesday. The Australian asset weakened while the US Dollar (USD) managed to firm up, as Federal Reserve (Fed) Chair Jerome Powell acknowledged the need for lower inflation to give policymakers greater confidence ahead of cutting interest rates in his speech at the Economic Club of Washington on Monday.

However, the Fed’s Powell acknowledged that the central bank has made some progress on inflation in the second quarter. Powell said, “We’ve had three better readings, and if you average them out, it’s a good place,” Reuters reported. His comments on progress on disinflation fueled confidence that rate cuts are not that far away.

Meanwhile, the Fed is widely expected to start cutting interest rates as early as its September meeting. Moreover, traders are betting that there will be two rate cuts instead of one, as officials noted in the latest dot plot.

Strong speculation that the Fed will start cutting interest rates as early as the September meeting has increased investors’ risk appetite. S&P 500 futures have posted nominal gains in European trading hours. The Dollar Index (DXY), which tracks the value of the greenback against six major currencies, remains above 104.00.

Investors will now focus on the monthly US sales data for June, due at 12:30 GMT. Retail sales are expected to remain unchanged.

In the Asia-Pacific region, investors are awaiting Australian employment data for June, scheduled for Thursday. Economists expect 20,000 new payrolls to be added compared to 39.7K added in May. The unemployment rate is expected to have held steady at 4.0%. Signs of tight conditions in the labour market would raise expectations for further policy tightening by the Reserve Bank of Australia (RBA). Investors are currently expecting the RBA to join the global trend of rate cutting next year.