AUD/USD extends gains, employment report next

• Australia’s inflation expected to decline

The Australian dollar has extended this week’s gains. In the North American session, AUD/USD is trading at 0.6357, up 0.36%.

Australia’s inflation expected to continue falling

Australia releases inflation on a quarterly basis, which magnifies the significance of each release. We’ll get a look at third-quarter inflation on Wednesday, with a market consensus of 1.1% q/q, compared to 0.8% in Q2. Inflation is expected to fall to 5.3% y/y in Q3, down from 6.0% in the second quarter.

Inflation eased in the second quarter, courtesy of a drop in fuel and food prices. The core inflation rate excludes energy and food prices but also declined in Q2 to 5.9% y/y, its lowest rate in a year. The drop in inflation is an encouraging sign and the Reserve Bank of Australia is hoping that the downtrend continues in the third quarter. Still, inflation is well above the RBA’s target range of 2-3% and it will be a challenge for the central bank to bring inflation back to the target range.

The RBA meets next on November 7th after holding rates for four straight months. What can we expect? Just two weeks ago, the rate odds for a quarter-point hike at the November meeting were just 3%, according to the ASX RBA rate tracker. That has ballooned to 21% currently, which means that while a fifth consecutive pause is likely, it is no longer considered a shoo-in.

The RBA has been sending out a hawkish message, saying that the battle with inflation is far from over and further rate hikes remain on the table. Earlier today, Governor Bullock said the RBA “will not hesitate” to raise the cash rate over inflation fears. Despite the RBA’s jawboning, the markets are leaning towards another pause, and provided that Wednesday’s inflation report is not hotter than expected, it should cement a pause at the November meeting.

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AUD/USD Technical

• AUD/USD has support at 0.6240 and 0.6184
• 0.6343 and 0.6399 are the next resistance lines

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