The Australian dollar is holding its ground ahead of the release of what is expected to be strong March quarter inflation figures.

At 0700 AEST on Wednesday, the local unit was trading at 93.67 US cents, level with its local close on Tuesday.

The consumer price index (CPI) is expected to hit 3.2 per cent for the 12 months to March, which would be above the Reserve Bank of Australia’s target band.

This outcome is unlikely to spark an interest rate rise because inflation is forecast to ease later in the year.

BK Asset Management managing director Kathy Lien said the inflation figure will be important to the Australian dollar’s future direction.

“The Australian dollar is trading very well ahead of its inflation report because annualised CPI growth is expected to top the central bank’s two to three per cent target range,” Ms Lien said.

“An increase in inflation would reinforce the central bank’s neutral monetary policy bias and alleviate their concerns about a strong currency.

“If CPI growth beats expectations, we could find the Australian dollar trading back above 94 US cents.”

Ms Lien said the market also was waiting for the release of the HSBC purchasing managers’ index (PMI) manufacturing figures for April, also due out on Wednesday.

“While there is no question that the Chinese economy is slowing, data hasn’t been as weak as economists anticipated,” she said.

“Currently, the market is looking for a small uptick in the manufacturing PMI index that could accelerate gains in the Australian dollar.”

AAP