AUD/USD reaches 8-month high on stronger-than-expected inflation data

Firmer CPI boosts AUD/USD

Just three weeks after hitting a nine-month low at 0.6348, the AUD/USD has taken the final steps on its path to redemption today, striking an eight-month high following the release of stronger-than-expected inflation.

Inflation data surpasses expectations

The monthly consumer price index (CPI) indicator rose by 3.5% year over year (YoY) in July, easing from 3.8% in June and surpassing consensus expectations of 3.4%. The ex-volatile measure eased to 3.7% in July from 4.0% in June. Annual trimmed mean inflation also eased to 3.8% YoY from 4.1% in June, slightly above market expectations of 3.7%.

Leigh Merington, Acting Head of Prices Statistics at the Australian Bureau of Statistics (ABS), noted, “CPI inflation is often impacted by items with volatile price changes like automotive fuel, fruit and vegetables, and holiday travel. It can be helpful to exclude these items from the headline CPI to see underlying inflation, which was 3.7% in July, down from 4.0% in June.”

Partial data for a new quarter and energy rebates

Today’s release for the first month of the new quarter only includes updates for about 60% of the basket. Additionally, it is skewed towards goods rather than troublesome service components such as dining out, medical services, and transportation. The modest decline in inflation was primarily due to a fall in energy prices following the start of the State and Federal government's energy rebates.

“The first instalments of the 2024-25 Commonwealth Energy Bill Relief Fund rebates began in Queensland and Western Australia from July 2024, with other states and territories to follow from August. In addition, state-specific rebates were introduced in Western Australia, Queensland, and Tasmania. Altogether, these rebates led to a 6.4% fall in electricity prices in July. Excluding the rebates, electricity prices would have risen 0.9% in July,” Mr Merington added.

RBA remains hawkish

Today's step-down in inflation was largely expected and is unlikely to be sufficient in isolation to cause the Reserve Bank of Australia (RBA) to abandon its hawkish bias at its board meeting next month.

Upcoming key economic data

Ahead of the 24 September RBA board meeting, the following key data is scheduled for release:

• Retail sales for July – Friday, 30 August
• Q2 2024 gross domestic product (GDP) – Wednesday, 4 September
• Labour force report – Thursday, 19 September

Nevertheless, the interest rate market still expects the RBA’s next move to be a rate cut, with a full 25 basis points (bp) RBA rate cut priced by year-end and a cumulative 72 bp of cuts by May 2025.

All groups monthly CPI indicator chart

AUD/USD technical analysis

Following release of the firmer CPI data, the AUD/USD traded to a high of 0.6813 before retreating towards support at 0.6800, previously a strong resistance level.

Traders may be cautious before chasing the move higher, considering the AUD/USD has already experienced a remarkable recovery over the past three weeks. Secondly, the key event risk of this week, Nvidia's earnings, still lies ahead tomorrow.

Finally, the US dollar, which has been the biggest loser this month, may benefit from potential month-end rebalancing flows.

If after all of that the AUD/USD is still trading above 0.6800, look for it to extend its market rally towards the December 0.6871 high before multi-month trendline resistance at 0.6840.

AUD/USD daily chart

• _{Source: TradingView. The figures stated are as of 28 August 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}