Aussie’s decline continues after inflation report

• Australia’s inflation rises to 5.2%

The Australian dollar has extended its losses on Wednesday and has dropped 1% on the week. In the European session, AUD/USD is trading at 0.6374, down 0.35%. The Australian dollar finds itself perilously close to 0.6357, an 11-month low.

Australian inflation rises due to higher fuel costs

Australia’s inflation rate rose 5.2% y/y in August, up from 4.9% y/y in July and matching the consensus estimate. This marked the first acceleration in inflation since April, due in large part to higher fuel prices, which also contributed to a high monthly reading of 0.8%, up from 0.3% in July. A key core inflation indicator eased to 5.5% y/y, down from 5.8% y/y in July.

The inflation data didn’t have much of an effect on the markets, which are widely expecting a fourth straight pause from the Reserve Bank of Australia in October. The markets are viewing the uptick in inflation as a temporary blip and expect the overall downward trend to continue, with expectations for a rate cut in May 2024.

The RBA meets next week, the first meeting since Michelle Bullock took over as the RBA Governor. Bullock has stressed that the door is open to further rate hikes and rate decisions will depend on the data. This stance is not surprising as the central bank does not want to state that rates have peaked while inflation remains well above the 2% inflation target. I expect the RBA to reiterate this view at the meeting.

A key question is whether Bullock will stick to hawkish rhetoric but continue to pause, or will she deliver one final rate hike before the end of the year. That decision will largely be based on economic data, such as the third-quarter inflation report in the last week of October.

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AUD/USD Technical

• AUD/USD is testing support at 0.6380. The next support line is 0.6320
• There is resistance at 0.6446 and 0.6506

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