Australian Dollar outperforming after overnight Aussie CPI beat

The Australian Bureau of Statistics (ABS) released a report overnight revealing a significant increase in inflation. From +3.6% in April, inflation rose by +4.0% in the twelve months to May in Australia. This data, which surpassed the market’s median estimate of +3.8% (Reuters poll), is particularly noteworthy. The monthly CPI indicator accelerated for a third consecutive month and matched the upper forecast (Reuters), along with the trimmed-mean CPI inflation print, which rose +4.4%, exceeding RBA forecasts.

On the whole, this was an upside surprise, to which markets reacted accordingly.

According to the ABS, the largest upward contributions to year-on-year inflation in May were rising housing prices (+5.2% from +4.9% in April), rising rent costs (+7.4%), and electricity costs (+6.5%, up from +4.2% in April). Price growth was also seen in food and non-alcoholic beverages and transport categories.

RBA meeting: ‘Not ruling anything in or out’

As you may recall, the June policy meeting saw the Cash Rate remain on hold at 4.35% (12-year peak) for a fifth straight meeting. The rate statement maintained much of the previous guidance, repeating that although inflation is slowing, it is doing so more gradually than expected and emphasised the need to be vigilant to upside risks to inflation.

You might also recall that the RBA’s rate statement stressed that the central bank ‘will do whatever it takes’ to control inflation. This point was emphasised by the RBA Governor Michelle Bullock at the press conference, who underlined that the central bank ‘is not ruling anything in or out’. 

The inflation beat also follows commentary from various RBA officials, expressing the need for vigilance on upside surprises in inflation. Assistant Governor Christopher Kent made the airwaves this week, commenting that the RBA remains alert to upside risks in inflation and requires further easing in core consumer prices before rate cuts are on the table.

Markets: Increased rate hike expectations – AUD bid

Unsurprisingly, a hawkish rate repricing was seen following the latest inflation numbers, with investors pricing in a circa 30% probability of a rate hike occurring in August (+7 basis points priced in) and approximately a 40% chance of a hike at September’s meeting (+10 basis points). Yet, with another inflation release due on 31 July just ahead of the August meeting, it is unlikely that the RBA will opt for a hike at the next meeting and likely remain on hold for the remainder of this year, taking a higher-for-longer route rather than increasing the Cash Rate.

The AUD/USD currency pair is at an interesting location.

Chart studies reveal notable resistance in play despite the AUD catching a bid. The monthly chart has been working with a resistance level from $0.6670 since May, together with the upper boundary of a possible symmetrical triangle forged from $0.7158 and $0.6170. Adding to this, the Relative Strength Index (RSI) remains hovering around the underside of the 50.00 centreline.

However, resistance on the daily chart falls in at $0.6690, a level withstanding three upside attempts since mid-May. With the pair unable to cross beneath the 50-day simple moving average (SMA) at $0.6607, this places a bold question mark on the strength of the current daily resistance level.

Given that rate expectations are beginning to shift toward a hike, thus benefiting the AUD, this could eventually pull the currency pair above said daily resistance and open the door to daily resistance as far north as $0.6865. Note, though, that this would entail pushing through monthly resistance. Therefore, strict trade management would benefit any longs executed north of current daily resistance.