- The Australian Monthly Consumer Price Index is foreseen at 3.8% YoY in June.
- Quarterly CPI inflation is expected to have risen at an annualized pace of 1% in Q2.
- The Reserve Bank of Australia will meet on August 6 to discuss monetary policy.
- The Australian Dollar retains its weak tone, trading against the USD at its lowest in two months.
Australia will publish fresh inflation-related figures on Wednesday, just before the Bank of Japan (BoJ) and the US Federal Reserve (Fed) monetary policy announcements. The Australian Bureau of Statistics (ABS) will release two different inflation gauges on Wednesday. Ahead of the announcement, the Australian Dollar (AUD) trades near a two-month low against the US Dollar, with AUD/USD changing hands just above 0.6500.
On the one hand, the ABS will unveil the quarterly Consumer Price Index (CPI) for the second quarter of 2024 and on the other, the June Monthly CPI, an annual figure that compares price pressures over the previous twelve months. It is worth remembering that the quarterly report includes the Trimmed Mean Consumer Price Index, the Reserve Bank of Australia’s (RBA) favorite inflation gauge.
When it met in mid-June, the RBA kept the Cash Rate steady at 4.35%. Policymakers noted they discussed raising rates but ultimately opted to keep them on hold. The board refrained from ruling out a potential rate hike, and policymakers stated they would remain vigilant on inflation amid the unexpected uptick in price pressures in May.
What to expect from Australia’s inflation rate numbers?
The ABS is expected to report that the Monthly CPI rose by 3.8% in the year to June, easing from the 4% posted in May. The quarterly CPI is foreseen rising 1% QoQ and up 3.8% YoY in the second quarter of the year. Finally, the RBA Trimmed Mean CPI, the central bank’s preferred gauge, is expected to rise by 4% YoY in Q2, matching the reading from the previous quarter.
An unexpected increase in inflation figures through the first quarter of 2024 has not only pushed away the odds for an RBA interest rate cut but also revived speculation of a potential hike. Not only does inflation remain above the central bank’s goal, but it also unexpectedly rose in the first quarter of the year.
However, signs of sluggish growth have also become evident and the RBA is well aware of it. “Household consumption growth has been particularly weak,” according to RBA’s May Monetary Policy Statement. Furthermore, the document shows that “Recent information indicates that inflation continues to moderate, but is declining more slowly than expected.” Finally, policymakers stated that “returning inflation to target within a reasonable timeframe remains the Board’s highest priority.”
In such a scenario, even with an unexpected uptick in price pressures, the case for a Cash Rate hike should be moderate. Still, speculative interest may opt to price it in, sending the Australian Dollar sharply up against most major rivals.
Softer-than-anticipated CPI figures, on the other hand, should lift the odds for an interest rate trim before year-end, and put the AUD under strong selling pressure.
How could the Consumer Price Index report affect AUD/USD?
The RBA will meet on Tuesday, August 6, and announce a fresh decision on monetary policy. This enhances the relevance of the CPI figures that will be the core of the Board’s decision.
At this point, it is worth remembering that multiple central banks have already trimmed interest rates or will soon do. If the RBA takes too long to cut rates or even chooses to hike them, the AUD may strengthen beyond reasonable to support local growth.
Ahead of the release of the CPI reports, the AUD/USD pair accumulated roughly 300 pips of straight losses from the peak set at 0.6797 by the end of June to the 0.6512 low posted on July 25.
Valeria Bednarik, FXStreet Chief Analyst, says: “The AUD/USD pair shows modest signs of bearish exhaustion after flirting with the 0.6500 figure, yet there are no technical signs of a directional change. The daily chart shows that the pair keeps developing below all its moving averages, with the 20 Simple Moving Average (SMA) heading firmly south above the longer ones. The immediate SMA is the 200, providing dynamic resistance at around 0.6585. Technical indicators, in the meantime, lack directional strength, consolidating at oversold levels.”
Bednarik adds, “The AUD/USD pair needs to extend gains beyond 0.6600 and remain above the level to kick-start a bullish correction. Whether it could continue upward will depend on a break above the 0.6690 level, the 61.8% retracement of the 0.6797/0.6512 slump. A break through the bottom of the range exposes the 0.6470 price zone, while below the latter, the pair could fall towards the 0.6400/30 area.
Economic Indicator
Monthly Consumer Price Index (YoY)
The Monthly Consumer Price Index (CPI), released by the Australian Bureau of Statistics on a monthly basis, measures the changes in the price of a fixed basket of goods and services acquired by household consumers. The indicator was developed to provide inflation data at a higher frequency than the quarterly CPI. The YoY reading compares prices in the reference month to the same month a year earlier. A high reading is seen as bullish for the Australian Dollar (AUD), while a low reading is seen as bearish.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
