COMMENT-AUD/USD bulls may run into the US inflation buzz saw

AUD/USD hit a 1-month high Tuesday after breaking the 76.4% Fibo retracement of the 0.6667-0.6482 drop as commodity and Chinese yuan gains helped underpin the pair recently, though U.S. CPI and PPI reports could still derail the rally.

AUD/USD longs benefited from help provided by iron-ore (DCIOc2) and gold GOLD rallies, which appear driven by investors leaning towards three Fed rate cuts in 2024 despite recent U.S. data suggesting inflation may be rising again.

Gains against the U.S. dollar by China's yuan USDCNH driven by the prospect of better economic growth has helped buoy the Australian dollar as it remains a proxy for China growth.

One risk for investors is complacency in the face of the threat that inflation could become a growing issue for the U.S. economy.

The NFIB small business optimism index fell in March to its lowest level since December 2012. Much of that drop was driven by owners reporting inflation, up two points from February, as the single most important problem they face.

If the NFIB report proves to be a harbinger of above-forecast CPI and PPI, markets may price in lower probabilities for the Fed to cut rates in 2024, allowing the U.S. dollar to rally while pushing commodities and China's yuan lower, in turn threatening AUD/USD's recent rally.

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