Australian Inflation Preview: Surprises in Monthly Consumer Price Index to rock the Aussie

The Australian Bureau of Statistics (ABS) will release the Monthly Consumer Price Index (CPI) Indicator on Wednesday, August 30,  which measures the inflationary pressures of the previous 12 months. In July, the CPI is expected to have eased to 5.2% YoY from the 5.4% posted in June.

Consumer Price Index surprises in the docket

However, this time, the outcome may differ from market expectations amid a change in the weights of the monthly CPI. The statistics office notes that the weights for the indicator are typically updated every October but warns that the continued increase in Australians holidaying overseas led to a partial update to be implemented in July.

“The partial update will see the weight for International holiday travel increase, with the weight for the other components in the basket adjusted to offset the increase in travel weights. The updated weights will be published as part of the July Monthly CPI indicator release on 30 August 2023,” according to ABS.

With that in mind, a wide deviation should be no surprise, although it will probably be. Furthermore, the quarterly CPI rose 0.8%  in the three months to June and by 6% compared with the same quarter in the previous year.

Reserve Bank of Australia premiering Governor

In any case, Australian inflation is more than doubling the Reserve Bank of Australia (RBA) target band of between 2% and 3%.

Meanwhile, the central bank also took note of shrinking consumer spending and the headwinds households face in the current scenario. The RBA left the Cash Rate unchanged at 4.1% in August, following a similar decision in July. Australian policymakers said they needed more time to assess the impact of hiking rates to the highest level in 11 years, yet added that further tightening might be needed to tame inflation.

Market players are betting the RBA will also remain on hold in September, pretty much believing the tightening cycle is over. For the most, speculative interest anticipates one more hike of 25 basis points (bps) before year-end. But there is always a caveat. Governor Philip Lowe will preside over the voting committee for the last time in September, as current Deputy Governor Michele Bullock will become the new RBA Governor on September 18.

In her latest public appearance, Deputy Governor Bullock said interest rates may need to rise again as inflation is still too high, adding policymakers would be data-dependent, in line with the  RBA’s latest guidance.  

 So, inflation can surprise amid a change in the calculation, while the RBA can follow suit with its new Governor.

AUD/USD Technical outlook

The Australian Dollar advances against its American rival ahead of the inflation data release, although gains are modest and follow a six-week slump. AUD/USD seems to be in a corrective advance, trading around 0.6450.

From a technical point of view, the upside seems limited, given that the pair trades well below a firmly bearish 20 Simple Moving Average (SMA) in the daily chart. At the same time, technical indicators remain within negative levels, without enough upward strength to support another leg north.

Softer-than-anticipated inflation figures would reinforce the idea the RBA will stand pat. In an ideal scenario, that would put pressure on AUD/USD. Still, easing price pressures will also mean the Australian economy could dodge an economic setback and trigger optimism, sending AUD/USD in the opposite direction.

However, if the monthly CPI comes higher than anticipated, financial markets could lift bets for a rate hike as soon as September. The AUD/USD pair could surge as an immediate reaction to the news, but it can have a hard time holding on to such gains, particularly if market sentiment remains sour.

A potential bullish target and critical resistance level is last week’s high at 0.6487. Bulls can take over if AUD/USD surges past the level,  aiming then for the 0.6530 price zone.