Australian Dollar Could Fight Back If CPI Claws Back To 2%

Australian Dollar Could Fight Back If CPI Claws Back To 2%

Currency Pair: Bullish AUD/USD

Expertise: Globasl Macro

Average Time Frame: Two Days

DailyFX Quarterly Forecasts have been updated for Q2 and are available here

The Australian Dollar took a pounding against its big US brother last week, with a variety of factors contributing to its downfall.

US interest rates look set to continue gaining for one thing, while the Reserve Bank of Australia isn’t expected to make even the first increase to its own record-low setting until well into 2019. Weaker Chinese stock markets also weighed on the Aussie, which can often act as the currency market’s favorite liquid China bet. Domestic data have tended to disappoint too, with the most recent Australian labour-market numbers showing job-creation well below expectations.

However, Tuesday will bring official Consumer Price Index numbers for the first quarter and here expectations are significant. The annual rate is expected to have increased to 2%, from the 1.9% chalked up in the last three months of 2017. This may only be a small rise but, if seen, it is bound to be psychologically significant. It would put the rate back within the RBA’s 2-3% target band for the first time since the first quarter of 2017, and prolong an admittedly nascent rising trend into a third straight quarter.

Of course, it’s important not to overstate the likely impact of a single on-target inflation print. Market expectations have been well-flagged for quite some time and, presumably, priced in to some extent. However, they would now come against the backdrop of a much lower AUD/USD rate.

That may magnify the psychological effect of rising inflation. Don’t forget, weaker pricing power has been one key reason the RBA has cited in its interest-rate caution- an as-expected CPI print would undermine that argument.

It’s not unreasonable to expect a bounce, perhaps into the mid 0.77s for AUD/USD if the data come in as expected, or stronger.

Australian Dollar Could Fight Back If CPI Claws Back To 2%

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— Written by David Cottle, DailyFX Research

Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!

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