AUD/USD rally to be tested by sharp decline in Australian CPI
The AUD/USD nears 2024 highs, driven by a dovish Federal Reserve and hawkish Reserve Bank of Australia. Focus on monthly CPI indicator amid inflation concerns.
Fed's dovish stance supports AUD/USD rally
At the start of a new week, the AUD/USD hovers close to its 2024 highs after securing a third consecutive week of gains.
Last week's rally followed comments from Federal Reserve (Fed) Chair Powell at Jackson Hole, which validated market expectations of Fed interest rate cuts before year-end. The US interest rate market is currently pricing in a 75% chance of a 25 basis point (bp) Fed rate cut and a 25% chance of a larger 50 bp cut in September.
RBA considers rate hikes and lower volatility boost AUD/USD
In contrast, on the home front, the minutes from the Reserve Bank of Australia’s (RBA) August board meeting confirmed that the RBA discussed raising rates again to address stubborn inflation, which is currently testing the RBA's patience.
In addition to a dovish Fed countering a hawkish RBA, gains in the AUD/USD were also supported by risk-seeking flows and lower volatility as concerns about a hard landing, which surfaced after July’s soft US non-farm payrolls report, continued to fade.
Key event: monthly CPI indicator
This week's key event for the AUD/USD will be Wednesday's monthly consumer price index (CPI) indicator. While this is likely to bring some relief to households grappling with the cost-of-living crisis, it could present a headwind for the high-flying AUD/USD.
RBA monthly CPI indicator
Date: Wednesday, 28 August at 11.30am AEST
Key Australian inflation measures released in late July were marginally softer than expected:
- Headline inflation: rose by 1.0% in the June quarter (the consensus was +1.0%), bringing the annual rate to 3.8%, up from 3.6% previously. This marks the first increase in annual CPI since December
- The trimmed mean: rose by 0.8% in the June quarter (consensus was +1.0%), allowing the annual rate to fall to 3.9% from 4.0% prior – marking the sixth consecutive quarter of lower annual trimmed mean inflation
- The monthly CPI indicator: for June rose by 3.8% over the 12 months to June, easing from 4.0% in May. The core reading eased to 4.1% from 4.4% in May.
The RBA's board meeting minutes from August highlighted the slow pace of inflation's decline towards its 2-3% target: "Underlying inflation had fallen very little over the prior year in quarterly terms, and while the June quarter outcome had been in line with the staff's forecast, inflation was still some way above target."
Limited updates in new monthly CPI indicator
As July is the first month of the new quarter, this monthly CPI indicator will only provide updates on about 60% of the basket. Additionally, it will be skewed towards goods rather than the troublesome service components such as dining out, medical services, and transportation.
However, due to a sharp fall in energy prices following the start of the Federal Government's energy rebates, headline inflation in July is expected to fall to 3.3% year-on-year (YoY), edging closer to the RBA’s 2-3% inflation target.
This partially explains why the Australian interest rate market is currently pricing in 28 bp of RBA rate cuts by year-end and a cumulative 76 bp of cuts by May 2025.
Monthly CPI indicator chart
Last week's gains saw the AUD/USD test resistance at 0.6798, stemming from the mid-July high. While the AUD/USD remains below the 0.6798 resistance level, it may rotate back towards horizontal support at 0.6700.
If the AUD/USD can break above 0.6800, it could open up a test of the December high at 0.6871, before encountering multi-week trendline resistance at 0.6940, originating from the 0.8007 high in February 2021.
AUD/USD daily chart
- Source: TradingView. The figures stated are as of 26 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.
The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.
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