AUD/USD falls as soft CPI prompts renewed hopes of an RBA pause

• Whilst headline inflation was much higher than expected at 6% y/y, the quarterly print undershot expectations at 0.8% (1% forecast).
• More importantly, trimmed mean CPI rose 5.9% y/y as expected, which keeps the RBA on track for 4% by December assuming the current rete of disinflation holds.
• Trimmed mean also undershot expectations at 0.9% q/q ( 1.2% previously, 1.1% forecast) which is a 7-quarter low
• All three annual rates of inflation (CPI, trimmed mean and weighted) have are decelerating

It looks like the RBA got what they wanted with this latest set of inflation figures. Whilst headline CPI was much higher than expected, traders are focussing on the softer trimmed mean figures which keeps the RBA on track for a 4% by December. And that means they’re now pricing in another pause in August. The fact that AUD/USD has tanked and the ASX 200 has rallied suggests traders are looking past the headline figure and are pricing in a pause.

But let’s remember that RBA continue to have a relatively low cash rate of 4.1%. Whilst today’s figures provide breathing room to pause at the next meeting, the RBA remain data dependant and potentially live at each meeting – with the potential for one or two more hikes in the future. But they’ll drag their heels hiking as much as they can and won’t if they think they can get away with it. And if the Fed deliver a hawkish hike, it changes the game again and puts pressure on other CB to retain hawkish bias. Overall, I suspect the RBA will be in for another ‘finely balanced debate’ at their August meeting.

How the markets reacted to Australian inflation data

The Australian dollar spike lower against all of its FX major peers, with AUD/JPY, AUD/USD and AUD/CAD being the weakest pairs of the session. That said, none of the major pairs and crosses have exceed their 10-day ATR (average true range), but it is certainly a more volatile session than we would tend to expect heading into an FOMC meeting.

AUD/NZD has retraced from the 1.920 cycle highs having reached out 1.090 target last week. AUD/JPY is on track to form a bearish outside after its rally stopped just shy of the inverted H&S pattern we flagged last week. AUD/USD erased all of yesterday’s gains but found support at 0.6730, and we suspect volatility will now receded as we await the FOMC meeting. The ASX 200 has seen a clear break of the Marc, April and June highs but has met resistance at 7400. It will now need to take its cue from global stock market sentiment, but a dovish Fed hike could result on a bullish breakout tomorrow.

AUD/USD daily chart:

AUD/USD handed back all of Monday’s gains following the CPI report but found support at the 200-day MA< and has since pulled back to the 200-day EMA. It is debatable as to how much bearish follow through we may see in the European session given the FOMC meeting looms. And that could turn out to be the main driver for the Aussie after all.

In fact, we could even see AUD/USD rally despite bets of an RBA pause if the Fed deliver a dovish tone as it could trigger a strong risk-on rally and benefit the Aussie. In which case, we’d expect it to hold above the 200-day MA.

The upper 1-day implied volatility band sits around the 2023 open price of 0.6816. A break above this level brings the June and July highs into focus around 0.6700.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge