The Australian dollar (AUD) maintained its early gains after Australia’s monthly consumer price inflation (CPI) rose last month. The CPI accelerated to 5.2% on-year in August, in line with expectations and higher than the previous months. This reinforces the view that interest rates will remain high for a longer period. The Reserve Bank of Australia (RBA) may continue to be hawkish due to the persistently high inflation. However, the monthly CPI figures may not be a reliable indicator of the quarterly CPI, which holds more significance for the RBA.
The former chief of the RBA, Philip Lowe, has expressed concern that wages and profits may exceed the levels consistent with inflation returning to the target range in late 2025. The RBA has maintained the benchmark rate at 4.1% and expects inflation to return to the 2-3% target range by late 2025. Markets anticipate another rate hike early next year and have ruled out a cut in 2024. Additionally, surging US yields and geopolitical tensions have dampened risk appetite. Despite the support measures taken by Chinese authorities, worries about the Chinese economy persist.
From a technical perspective, AUD/USD has faced resistance at the late-August high of 0.6525. The lack of upward momentum on higher timeframe charts suggests a sideways to downward trend. A break below the early-September low of 0.6350 could trigger a minor double top, potentially leading to a decline to the October 2022 low of 0.6170. In the AUD/NZD pair, the lower end of the range is being tested at the July low of 1.0720. A break below this level could initially lead to a decline to the May low of 1.0550, but the broader range remains between 1.05 and 1.11.
In conclusion, the Australian dollar held its gains following an increase in Australia’s monthly CPI. The persistent high inflation raises the likelihood of the RBA maintaining a hawkish stance. However, the monthly CPI figures may not accurately reflect the quarterly CPI, which is more relevant for the RBA. Additionally, concerns about the Chinese economy and geopolitical tensions continue to weigh on sentiment. From a technical standpoint, AUD/USD is facing resistance and may see a downward trend, while AUD/NZD is testing the lower end of its range.
