AUD/USD down for fourth week; eyes on Australia's q4 inflation before RBA decision

A fourth consecutive weekly fall for the AUD/USD, as it finished the week at .6573 (-0.35%), extended its pullback from the late December .6871 high.

Last week's weakness in the AUD/USD came despite the price of iron ore snapping a two-week losing streak and new stimulus announcements in China, including a cut to the Reserve Requirement Ratio.

On top of this, the Australian federal government is tinkering with the stage three income take-cuts, which will boost the economy more than previously estimated by the RBA, and reduce the prospect of rate cuts in the second half of 2024.

This week's key local economic event for the AUD/USD will be Wednesday's December quarter (Q4) inflation data - one of the last pieces of data the RBA will receive before its first board meeting of 2024 on Tuesday, February 6th.

What is expected from Australia's December quarter (Q4) inflation data (Wednesday, January 31st at 11.30 am)

In the September 2023 quarter (Q3), headline inflation rose by 1.2%, up from 0.8% in the June quarter and above expectations for a 1.1% increase. Annual Trimmed mean inflation eased to 5.2%, from 5.9% in the June quarter, but it is still well above the RBA's 2-3% inflation target.

In the December quarter (Q4), headline inflation is expected to increase by 0.8% for an annual rate of 4.3%. The Trimmed mean is expected to rise by 0.9%, allowing the annual trimmed mean rate to ease to 4.3%. At this rate, inflation will be below the RBA's forecast of 4.5% (for trimmed mean) and support expectations of RBA rate cuts in the second half of 2024.

Australian trimmed mean inflation chart

AUD/USD technical analysis

Looking past the price action over the past eight sessions, which has seen the AUD/USD tightly pinned to the 200-day moving average at .6581.

From the October .6270 low to the December .6871 high, the AUD/USD gained just under 10% in two months. The rally unfolded in five waves (Elliott Wave), which suggests the pullback from the .6871 high is part of a correction rather than a reversal lower.

This view is supported by the AUD/USD continuing to hold above a strong layer of horizontal support at .6520/00, which includes the 61.8% Fibonacci retracement of the October to December rally at .6500c.

Therefore, leaning against support at .6520/00, a positive bias is in place, looking for a rebound initially towards resistance at .6700/25. The bullish view would increase in confidence on a daily close above recent highs in the .6620 area.

Aware that if a sustained break of .6520/00 were to occur, it would warn that a deeper decline is unfolding towards 6400c.

AUD/USD daily chart

• _{Source: TradingView. The figures stated are as of 29 January 2023. 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.}