The Australian CPI (Consumer Price Index), which is released every quarter, measures the change in the price of goods and services charged to consumers. A reading which is higher than forecast is bullish for the Australian dollar.

Indicator Background

CPI, also known as inflation, is one of the most important economic indicators. Analysts carefully track CPI numbers, as higher inflation is an indication of greater economic activity.

In Q3 of 2011, CPI jumped to 1.4%, easily beating the forecast of 0.9%. This was its highest level since early 2011, and indicates more activity in the Australian economy. The estimate is lower for Q4, with an expected reading of a 0.4% gain.

Sentiments and levels

The Australian dollar has enjoyed a solid January, and has spent most of the month above the 1.05 line. However, the strong performance has tapered off recently, and weak employment numbers disappointed the market. Further weak data could hurt the Aussie. At the same time, positive Chinese data has been good news for Australia, and further solid releases from the Asian giant could give the Australian dollar some upwards momentum. Much will depend on the news out of the US – if the debt ceiling issue worsens or the economic recovery stalls, we could see a flight of capital away from riskier currencies like the Aussie, towards the safe-haven US dollar.Thus, the overall sentiment is neutral on AUD/USD towards this release.

Technical levels, from top to bottom: 1.0850, 1.0739, 1.0605, 1.0508, 1.0418, and 1.0326.

5 Scenarios

  • Within expectations: 0.1% to 0.7%. In this scenario, AUD/USD could show some slight fluctuation, but it is likely to remain within range, without breaking any levels.

  • Above expectations: 0.8% to 1.1%: A reading above expectations would be an indication of greater inflation, and could push the pair above one resistance level.

  • Well above expectations: Above 1.1%: An unexpectedly sharp rise in inflation could push AUD/USD upwards, possibly breaking two or more lines of resistance.

  • Below expectations: -0.3% to 0.0%: A lower than expected reading could pull the pair downwards, with one support level at risk.

  • Well below expectations: Below -0.3%: Such a reading could hurt the Aussie, and the pair could break two or more support levels.