AUD/USD trades in a firm range ahead of Wednesday's US CPI print

• AUD/USD trades near 0.6520 at the time of writing, with US-China relations increasing demand for commodity-linked currencies.
• Australia's Westpac Consumer Confidence disappoints, but improving sentiment limits AUD losses.
• The US Consumer Price Index (CPI) on Wednesday is expected to drive the Fed narrative and US Dollar demand.

The Australian Dollar (AUD) is consolidating against the US Dollar on Tuesday, as AUD/USD trades above 0.6500 at the time of writing.

Developments in US-China trade talks in London continued to support risk sentiment, boosting demand. Although the improved relations provided some support for the US Dollar, AUD/USD benefited from Australia's close ties with China.

With senior officials from both countries signaling progress, the talks have helped improve broader risk sentiment, offering the Aussie some support in the face of weaker domestic data. On Tuesday, Westpac Consumer Confidence index data for June dropped to 0.5%, down from 2.2% in May, signaling a notable decline in household sentiment. 

However, since China is Australia's largest trading partner, easing tensions between the US and China also helps support demand for commodities, a prominent driver of the AUD/USD price pair.

US CPI and Fed expectations provide an additional headwind for the Greenback 

Looking ahead, markets remain focused on the monetary policy divergence between the Federal Reserve(Fed) and the Reserve Bank of Australia (RBA). 

On Wednesday, the United States will release the Consumer Price Index (CPI) for May, which is expected to inform expectations for the Fed.

Headline inflation is projected to rise to 0.3% MoM in May, up from 0.2% in April, with the annual rate climbing to 2.5% from 2.3%. 

Core CPI, which strips out food and energy prices, is also forecast to increase 0.3% MoM, compared to 0.2% previously, with the annual reading rising to 2.9% from 2.8%. 

According to the CME FedWatch Tool, market participants expect the Fed to leave interest rates unchanged within the current 4.25% to 4.50% range at both the June and July meetings, with a 53.6% probability of a rate cut priced in for September.

If inflation shows additional signs of easing, the Fed could adopt a more flexible approach to its monetary path, which could ease near-term rate expectations. Softer rate expectations could support the AUD, while rising inflation will likely solidify a pushback in Fed rate cut bets, providing support for the US Dollar.