Stronger than expected core inflation numbers for the final quarter of 2014 have helped to quash rumours that the RBA may cut the OCR at its monetary policy meeting next Tuesday, sparking a rally in the Australian dollar. AUDUSD jumped through 0.8000 shortly after the figures were released on Wednesday as OIS pricing indicated that the market cut its expectations for a 25 basis point cut next Tuesday to below 20% from above 40% yesterday.
Favour core inflation numbers over the headline figures
Consumer prices rose 0.2% last quarter, which was below expectations of a 0.3% rise. This dragged headline inflation to a very unimpressive 1.7% y/y. However, the falling rate of headline inflation can be mostly attributed to falling fuel prices which isn’t a bad thing for the economy; hence these numbers were ignored by the market. Instead, investors chose to focus on the more precise core inflation numbers which showed that core consumer prices rose an encouraging 0.7% last quarter (both trimmed mean and weighted median CPI rose 0.7% q/q). The two measures of core inflation put consumer price growth at 2.2% (trimmed mean) and 2.3% (weighted median), which is just above the bottom of the RBA’s 2-3% target range and, in the case of the latter, was slightly above market expectations.
What’s next for the RBA?
Today’s numbers aren’t going to be enough to completely rule out the possibility of the RBA cutting the OCR this year. Core inflation has been trending lower since mid-2014 and there are only tentative signs of a rebound at this stage, so if inflation continues to trend lower the RBA may be forced to act. The next set of official inflation figures are due out in late April, so based on that alone we don’t expect any movement in the OCR until at least then. However, the release of capital expenditure data in late February may open the door for a rate cut in March if we don’t see a pick-up in non-mining investment intentions and expenditure.
The aussie
AUDUSD has drifted back below 0.8000 since its initial rally on the back of today’s better than expected core CPI numbers. However, the pair could drift back above this level if we see board USD weakness or a rally in risk sentiment. Key short-term support currently resides around 0.7900 but it would likely take a strong rally in USD to push AUDUSD through that level in the near-term.
Source: FOREX.com
Recommended Content
Editors’ Picks
EUR/USD clings to daily gains above 1.0650
EUR/USD gained traction and turned positive on the day above 1.0650. The improvement seen in risk mood following the earlier flight to safety weighs on the US Dollar ahead of the weekend and helps the pair push higher.
GBP/USD recovers toward 1.2450 after UK Retail Sales data
GBP/USD reversed its direction and advanced to the 1.2450 area after touching a fresh multi-month low below 1.2400 in the Asian session. The positive shift seen in risk mood on easing fears over a deepening Iran-Israel conflict supports the pair.
Gold holds steady at around $2,380 following earlier spike
Gold stabilized near $2,380 after spiking above $2,400 with the immediate reaction to reports of Israel striking Iran. Meanwhile, the pullback seen in the US Treasury bond yields helps XAU/USD hold its ground.
Bitcoin Weekly Forecast: BTC post-halving rally could be partially priced in Premium
Bitcoin price shows no signs of directional bias while it holds above $60,000. The fourth BTC halving is partially priced in, according to Deutsche Bank’s research.
Week ahead – US GDP and BoJ decision on top of next week’s agenda
US GDP, core PCE and PMIs the next tests for the Dollar. Investors await BoJ for guidance about next rate hike. EU and UK PMIs, as well as Australian CPIs also on tap.