Australian CPI Preview: Why inflation is set to exceed estimates, and where AUD/USD could go

• Economists expect Australia to report a slower increase of 1.8% in prices in the first quarter.

• Evidence from other countries suggests the data could beat expectations. 

• AUD/USD has room to rise ahead of the all-important Fed decision.

AUD/USD bullish – inflation figures have exceeded estimates in most countries, and there is good reason to expect this phenomenon to repeat itself in Australia. The economic calendar points to an increase of 1.8% in the second quarter, a lower rate than 2.1% seen in the first three months of the year. 

While energy costs have dropped in June, it is hard to see Australian price pressures easing, at least not on headline inflation. Core prices, called Trimmed Mean CPI in Australia, carry more realistic expectations of 1.5% vs. 1.4% in the first quarter. 

Inflation rising from levels down under:

Source: FXStreet

Underlying inflation exceeded expectations in the US, the UK, the eurozone and also New Zealand – the latter being the best reference for Australia, as both countries are closely linked. Are economists specializing in the Australian economy more accurate than those in other places? I doubt that. Moreover, actual outcomes exceeded projections in three of the last four quarters, adding to the case of a bullish surprise. 

It is essential to note that employment continued growing rapidly in the land down under, reflecting a vibrant economy and an urge to splurge the cash saved in draconian lockdowns. That is another reason to expect price pressures to not only remain high but also beat estimates. 

Source: FXStreet

Australia's CPI data is published less than 24 hours before the US Federal Reserve's decision. Tension toward the all-important event in America could marginally limit the reaction in AUD/USD, but it would still be significant. Australia publishes inflation figures only once per quarter, making every publication a considerable market mover. 

AUD/USD Technical Analysis

Technically, the currency pair is trending higher since bottoming out in mid-June, but the pace of advances has slowed. Nevertheless, it is trading above the 50, 100 and 200 4h-SMAs, and the RSI is in the healthy bullish territory above 50 and below 70. 

Some resistance awaits at 0.6970, with more at around 0.6985. Further above, AUD/USD would already return to levels last seen last month, targeting 0.7035 and 0.7085. 

Support is at 0.6945, followed by 0.6895 and 0.6880. In the unlikely case, Australian CPI misses expectations, these levels could be challenged.