• AUD/USD is being pressured as the US dollar recovers in midday New York trade.
• The bears are moving in with US yields also rallying and as US stocks tail-off. 

The US dollar DXY, and the US 10-Year Treasury yields were lower which had been giving US stocks and higher beta currencies such as the Aussie a lift at the start of the New York day, extending the overnight gains. AUD/USD rallied from a low of 0.7062 to a high of 0.7136 on Thursday, extending the prior day's range of between 0.6946-0.7109. 

More inflation data released on Thursday rhymed with that of Wednesday's and embedded the hope that the Federal Reserve will be able to cool down price growth without shoving the economy into the deep freeze of recession. US stocks were higher in early trade on the fresh evidence of calming inflation but they have started to ease in midday trade as investors take profits and in the wake of a sell-off across the US dollar forex pairs with the 10-year yield rallying. At the time of writing, the 10-year yield is 3.41% higher on the day and has made a fresh high for the day of 2.880%. The move coincides with the 30-year bond auction. Meanwhile, the DXY, an index that measures the greenback vs. a basket of currencies is now back to near flat for the day at 105.14. The index has recovered from a low of 104.646.

July PPI month-over-month and year-over-year came in below expectations. In fact, the month-over-month reading was actually negative. Core readings were below the Reuters poll on a month-over-month basis and in-line on a year-over-year basis. The report lessened the prospects of the Fed up interest rates by 75 basis point for the third time in a row at the conclusion of its September policy meeting. Instead, CME Fed funds futures now predict a smaller 50 bp rate hike by nearly two to one.

Meanwhile, commenting on the US dollar and in light of yesterday's CPI data,  analysts at Brown Brothers Harriman said, ''we stress that there is a lot of noise right now even as markets remain thin during the summer months.'' 

''We are likely to continue seeing violent moves in the markets in the coming weeks as markets continue to struggle to find a stable and sustainable macro outlook to trade on.  Recession?  Soft landing?  Tightening?   Easing?  All of these questions remain unanswered right now and we will not know the truth for months, if not quarters.''

While the CPI data came in softer than expected, it has not changed the expected rate path of some Fed officials that spoke after the event. For instance, Neel Kashkari unleashed his inner hawk and said the July CPI data did not change his expected rate path, though he was happy to see inflation surprise to the downside. Kashkari stressed that the Fed is far from declaring victory over inflation and stressed that recession “will not deter me” from getting to the 2% target. 

Meanwhile, Mary Daly, President of the San Francisco Fed did not rule out a third consecutive 0.75 percentage point rate rise at the central bank’s next policy meeting in September, although she signalled her initial support for the Fed to slow the pace of its interest rate increases, the Financial Times reported. "We have a lot of work to do. I just don’t want to do it so reactively that we find ourselves spoiling the labour market," the central banker said while also indicating that she would be watching the next consumer price and non-farm payroll reports to better calibrate her decision.

RBA in focus

As for the Aussie dollar, Net AUD short positions increased for a third straight week reflecting the recent weakness in commodity prices. Markets are anticipation that the Reserve Bank of Australia will hike another 50 bps RBA rate hike this month. The central bank recently stated that the domestic economy has been resilient, forecasting the unemployment rate to drop to 3.25% over the coming months. Headline and underlying inflation are expected to peak around the end of this year and the Bank's cash rate assumption is for a year-end 2022 target rate of 3%. With the target cash rate currently at 1.85%, the RBA assumes another 115bps of hikes over the next 4 meetings. In other words, the RBA is placing some chance of delivering a 50bps hike and 3x25bps hikes for a total of 125bps in hikes by year-end. This would take the year-end 2022 cash rate to 3.10%.