Australian Dollar Outlook: AUD/USD Snubs Hot Q2 CPI as Sydney Lockdown Extends

• Australian second-quarter inflation beats estimates at 3.8% y/y

• Sydney 4-week lockdown extension darkens economic outlook

• AUD/USD may see upward movement on technical development

The Australian Dollar is largely unchanged versus the US Dollar despite stronger-than-expected second-quarter inflation data. On a year-over-year basis, the consumer price index (CPI) rose 3.8% versus a consensus estimate of 3.7%. A 0.8% q/q increase also beat expectations. The sharp rise in prices come amid a sweeping new wave of Covid lockdowns that have sent over half of the countrys population into lockdowns in recent months. It should be noted that the trimmed mean measurement, which the RBA watches more closely, clocked in-line with expectations at 1.6% y/y.

The data may help rekindle expectations for the Reserve Bank of Australia (RBA) to shift forward policy tightening actions. Given the ongoing situation around heightened Covid restrictions, however, the economic outlook remains on a shaky ground. In fact, Sydney, the capital city of New South Wales, announced a 4-week extension to restrictions on Wednesday before the CPI data hit the wires. Economists now fear that growth may retract next quarter, which will signal a stark reversal for an economy that was ahead of most of its peers earlier in the pandemic.

A series of downbeat economic data, including a sharp contraction in PMI data for the services sector, has dragged on the risk-sensitive Australian Dollar in recent weeks. The RBA will announce its August policy decision next week, and while headline CPI is now above the central banks 2-3% target, the Covid-fueled uncertainty will more than likely see the dovish undertone remain firmly in place. That will likely keep the Aussie Dollar weighed down until the outlook clears.

After four weeks of losses, AUD/USD weakness appears to be moderating. Prices have formed a base near the 0.7360 level after rebounding from a fresh 2021 low last week. The MACD line crossed above the oscillators signal line overnight, which may indicate some upward energy is forming. Breaking above the September swing high at 0.7413 and the falling 20-day Simple Moving Average (SMA) would put a bullish short-term spin on price action. Alternatively, weakness would likely see prices turn back toward the July low.