Fundamental analysis

AUD/USD: Rising Australian inflation and disturbing rumors about the Fed’s next steps

The Australian dollar, paired with the US currency, is storming the 64th figure, reacting to the release of data on inflation in the country. The report turned out to be “unipolar”: all components came out in the green zone, surpassing even the most daring expectations of experts. At the same time, the greenback is still under pressure: the US dollar index fell to the 110th mark, amid increased interest in risky assets. In other words, the situation is in favor of the upward scenario in AUD/USD, at least in the context of a large-scale correction.

To confirm their ambitions, buyers of the pair will have to consolidate above the intermediate resistance level of 0.6450, which corresponds to the Kijun-sen line on the daily chart. But the main target is slightly higher—at 0.6540, which is the upper line of the Bollinger Bands indicator on the same timeframe. Above this target, Aussie rose for the last time at the end of September, so this price barrier has a psychologically important significance.

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But back to Australian inflation. According to published data, the consumer price index in the third quarter jumped to 7.3% YoY (with a forecast of growth to 7.0% and the previous value of 6.1%). In quarterly terms, the indicator rose to 1.8% with a growth forecast of up to 1.6%. On a monthly basis, the CPI also came out in the green zone, reaching 7.3%. Again—all components of today’s report exceeded the expectations of most analysts.

On the one hand, this fundamental factor really supported the Australian dollar, and not only paired with the US currency, such crosses as AUD/JPY and AUD/NZD demonstrate upward dynamics. But on the other hand, the published inflation report is unlikely to be able to keep buyers of the AUD/USD pair in good shape for a long time. As soon as the first emotions settle down, Aussie will again focus on the dynamics of the greenback.

Indeed, by and large, today’s release, despite its “green color,” has not changed anything significantly. Representatives of the RBA may, to some extent, toughen their rhetoric, but at the same time, the regulator will continue to raise the interest rate in 25-point increments. Yes, inflation is growing at a faster pace, but it should be remembered that, according to the forecasts of the RBA, the CPI by the end of the year will be 7.8%. Therefore, the current growth of the index may be caused by “excessive concern” among RBA members, but no more.

Australian Treasurer Jim Chalmers said that the government does not expect a significant change in the inflation forecast. According to him, the Treasury expects inflation to peak at the same level at the end of the year (that is, at around 7.8%). It is also worth recalling the comments of RBA Governor Philip Lowe, who, following the results of the October meeting, made it clear that members of the central bank are afraid of the negative consequences of aggressive tightening of financial conditions for consumer spending. According to him, the simultaneous increase in inflation and an increase in the rate “put a lot of pressure on consumers’ budgets.” In addition, members of the Reserve Bank were concerned about the state of affairs in the labor market. Whereas the latest “Australian Nonfarm” were quite contradictory – for example, the indicator of the increase in the number of employed came out at around 0.9k with a forecast of growth of 25k.

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Therefore, in my opinion, the positive effect of today’s inflation release will be short-term. In the medium term, the Aussie will move in the wake of the US currency, which is weakening ahead of the November Fed meeting and against the backdrop of weak macroeconomic reports. In particular, the consumer confidence index dropped to 102 points, and the index of manufacturing activity from the Federal Reserve Bank of Richmond to -10 points. Such weak results have increased traders’ concern about the Fed’s next steps.

Rumors have spread in the market that the Fed would demonstrate a less hawkish attitude at the November meeting against the background of further signs of economic weakness in the United States. It is noteworthy that experts are discussing the possible results of the December meeting, and not the November one (at which the Fed is 97% likely to raise the rate by 75 points). The probability of a 75-point rate hike in December is gradually decreasing, and this fact puts pressure on the US currency.

Thus, the AUD/USD pair retains the potential for further corrective growth, but rather due to a temporary weakening of the greenback. Australian statistics supported the Aussie “at the moment,” but this fundamental factor will not be able to keep the AUD/USD pair afloat if dollar bulls strengthen their positions again.

The first and so far the main target of corrective growth is the mark of 0.6540—this is the upper line of the Bollinger Bands indicator on the D1 timeframe. Overcoming this target will open the way for buyers to the 66th figure, but it is too early to talk about it. Indeed, to date, the RBA has already slowed down the pace of tightening monetary policy, while the Fed is guaranteed to raise the rate by 75 points at least in November. All other assumptions are still speculation and cannot serve as a basis for a steady growth of AUD/USD.

The material has been provided by InstaForex Company – www.instaforex.com


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