AUD/USD rally stalls near 0.6800 with Aussie inflation in focus

• AUD/USD struggles to extend its upside above 0.6800 as investors have sidelined ahead of Aussie inflation for July.
• The appeal of risky assets remains firm amid optimism over Fed interest rate cuts in September.
• The next move in the US Dollar will be guided by the US core PCE inflation for July.

The AUD/USD pair turns sideways after a juggernaut rally to a fresh six-week high near 0.6800 in Tuesday's European session. The rally in the Aussie asset appears to have stalled as investors shift focus to the Australian monthly Consumer Price Index (CPI) data for July, which will be published on Wednesday.

Annually, the inflation data is estimated to have decelerated to 3.4% from the prior release of 3.8%. An expected decline in price pressures would market speculation that the Reserve Bank of Australia (RBA) is unlikely to cut interest rates this year.

Meanwhile, upbeat market sentiment continues to cushion the downside in the Australian Dollar (AUD). The market mood seems favorable for risky assets, given that the Federal Reserve (Fed) is widely anticipated to start reducing interest rates from the September meeting. S&P 500 futures have posted decent gains in European trading hours. The US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, struggles to gain ground after posting a fresh year-to-date low of 100.53.

Although Fed September interest rate cuts appear certain, traders remain split over the potential rate-cut size. According to the CME FedWatch tool, 30-day Federal Funds Futures pricing data shows that the probability of a 50-basis points (bps) interest rate reduction in September is 28.5%, while the rest points to a 25-bps rate cut.

For fresh cues about the likely size, investors await the United States (US) core Personal Consumption Expenditure Price Index (PCE) data for July, which will be published on Friday. The annual core PCE is estimated to have accelerated to 2.7% from the prior release of 2.6%, with monthly figures growing steadily by 0.2%.