Australian Quarterly CPI Preview: A surprise lift in inflation on the cards

The Australian Bureau of Statistics (ABS) will publish the Q1 2021 CPI on Wednesday at 0130 GMT.  The CPI is expected to hold steady at 0.9% QoQ in the first quarter, after decelerating in the final quarter of 2020. The 12-month CPI rate is seen sharply higher at 1.4% in Q1 vs. 0.9% booked previously. The Reserve Bank of Australia’s Trimmed Mean CPI is expected to firm up to 0.5% QoQ while on an annualized basis the figure is likely to remain unchanged at 1.2%.

A 9.5% hike in petrol prices, rising input costs for home building and a strong increase in rents are likely to be the main catalysts behind the expected rise in price pressures during the first quarter. Also, contributing to the upside in inflation are the factors including, education, pharmaceuticals and food.

Despite the expectations of a lift in the prices, the annual rate of inflation will continue to remain way below the Reserve Bank of Australia’s (RBA) 2-3% target band. However, an upside surprise to the quarterly CPI figures could fuel a debate for a change in the RBA’s monetary policy stance over the coming months.

Inflation surprise and the RBA

Australia’s relative success in beating the covid blues is seen by its solid path of economic recovery, although the country remains one of the laggards, with regard to the vaccination campaigns.

However, the employment sector remains strong while consumer confidence holds near 11-year highs, suggesting a continued rise in the price pressures. Australia emerged as one of the fastest economies to return to pre-pandemic employment levels after the jobless rate fell to 5.6% in March while the participation rate soared to a record high.

With the Australian central bank’s dual mandate of reduced unemployment and higher inflation, a surprise increase in the CPI figures could fuel a new debate for the RBA on when it would begin tapering the bond-buying program or adjust the yield curve control (YCC) policy framework.

Although the central bank’s April meeting’s minutes show that it “will not raise cash rate until actual inflation is sustainably in 2-3% target band,” any hints towards policy adjustment on encouraging data could revive the hawks and offer a tailwind to the Aussie dollar.

A data disappointment could be used as an excuse by the investors to trigger a correction in AUD/USD from near multi-day highs above 0.7800. But the price action could be limited by the pre-Fed caution. The Fed is expected to announce its monetary policy decision on Wednesday.

AUD/USD Technical outlook

AUD/USD: Daily chart

AUD/USD’s daily chart shows that the bulls are teasing a symmetrical triangle breakout, awaiting confirmation on closing above the falling trendline resistance at $0.7810. Note that aussie trades above all the key daily moving averages (DMA) while the 14-day Relative Strength Index (RSI) still hovers in the bullish region. The next upside target is envisioned at the March high of 0.7850, beyond which the 0.80 threshold could be back in the spotlight.

Downbeat data could recall the sellers, fuelling a retreat towards the horizontal 50-DMA at 0.7723, which is likely to emerge as strong support. If the sell-off intensifies, the 0.7700 barrier could be put at risk.