Australia CPI set to climb in September, fueling RBA rate-hike bets

Australian Consumer Price Index seen ticking higher in September
The Reserve Bank of Australia’s favorite Trimmed Mean CPI is expected to rise 0.3% MoM.
The Australian Dollar struggles to retain the 0.7000 mark against the US Dollar.

FXStreet Team FXStreet

The Australian Bureau of Statistics (ABS) will publish the September Consumer Price Index (CPI) on Wednesday at 00:30 GMT. The report is expected to show that inflation rose 4.2% from a year earlier, higher than the 4% posted in August. The monthly CPI is forecast at 0.7% following the 0.4% print from the previous month.

The ABS will also release the Trimmed Mean CPI, the Reserve Bank of Australia’s (RBA) favorite inflation gauge. The annual figure was 3.6% in August, while the monthly Trimmed Mean CPI is forecast to print 0.3% in September, up from 0.2%.

Ahead of the announcement, the Australian Dollar (AUD) trades a handful of pips above the 0.7000 psychological mark against the US Dollar (USD), as the latter strengthens amid risk aversion and ahead of the Federal Reserve (Fed) monetary policy announcement.

What to expect from Australia’s inflation rate data?

Central banks, including the RBA, base their monetary policy decisions on inflation. Price stability is a critical part of all major central banks' mandates, with some also aiming to keep unemployment tamed. The RBA has two key objectives: keep inflation low and stable, and ensure as many people as possible are in jobs.

The Australian seasonally adjusted Unemployment Rate stood at 4.7% in September, the highest in five years, yet policymakers seem less concerned about unemployment than about inflation. The September monetary policy statement noted that “The unemployment rate was now close to the assessment of full employment embedded in the August forecasts,” while on inflation, members assessed July inflation data, which led the staff to expect higher underlying inflation in the September quarter than had been forecast in August.

“Business liaison and surveys continued to record widespread reports of elevated cost growth and few expectations that those pressures would ease significantly over the year ahead,” the statement adds.

In the September meeting, the Board voted unanimously to increase the official cash rate target by 25 basis points (bps) to 4.6%, while leaving the door open for additional hikes as inflation remains “too high,” according to the minutes.

With that in mind, the upcoming inflation figures should support the case for further interest rate hikes ahead, maintaining the AUD under pressure.

A reading of 4.2% or above should push the AUD/USD pair higher, while if somehow inflation surges past the 4.6% YoY peak posted in March, the Aussie is likely to get a near-term boost. A reading below 4%, on the other hand, should cool hike expectations and push the AUD further south. However, with Oil prices holding near fresh multi-month peaks, the odds of a continued AUD advance are quite limited, specially ahead of the United States Federal Reserve’s (Fed) monetary policy announcement.

The Fed is widely anticipated to keep interest rates on hold, with market participants pricing in a December hike. Still, given Chair Kevin Warsh’s unwillingness to provide forward guidance, a surprise move is always on the table. Even further, the Fed is likely to deliver a hawkish message, which means there are little odds of a USD setback.

How could the Consumer Price Index report affect AUD/USD?

As previously mentioned, inflation is expected to have ticked higher in September, far above the RBA’s range goal of 2% to 3%. Ahead of the announcement, the AUD/USD pair hovers a handful of pips above 0.7000.

Valeria Bednarik, FXStreet Chief Analyst, notes: “From a technical point of view, the AUD/USD pair is neutral-to-bullish according to the daily chart. The pair holds above a flat 20-day Simple Moving Average (SMA) while battling a mildly bearish 100-day SMA at 0.7030. Technical indicators, in the meantime, picked up modestly within positive levels, skewing the risk to the upside.”

Bednarik adds: “The same chart shows that speculative interest is willing to buy on dips towards the 0.7000 figure, the immediate support level. A clear break below it exposes the 0.6930/50 area, ahead of 0.6880, July’s monthly low. AUD/USD would need to run past 0.7070 to gain upward momentum and advance towards its next resistance area at around 0.7130.”

Australian Dollar FAQs

What key factors drive the Australian Dollar?

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.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

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.

How does the health of the Chinese Economy impact the Australian Dollar?

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.

How does the price of Iron Ore impact the Australian Dollar?

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.

How does the Trade Balance impact the Australian Dollar?

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.

Economic Indicator

Consumer Price Index (YoY)

The Consumer Price Index (CPI), released by the Australian Bureau of Statistics on a monthly basis, measures the changes in the price of a comprehensive basket of goods and services acquired by household consumers. The indicator is the primary measure of headline inflation after a new methodology was applied to transition from quarterly to monthly readings, applying to data from April 2024 onwards. 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.

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