Aussie falls to 2-week low

The Australian dollar is in negative territory to start the week. AUD/USD is down about one percent since Thursday as the pair remains under pressure ahead of the Australian CPI release on Tuesday. In the European session, AUD/USD is trading at 0.7147, down 0.38% on the day.

CPI could have RBA implications

It should be an interesting start to the trading week as Australia releases key inflation data in the Tuesday Asian session. Employment data for December was better than expected, as the economy created 64.8 thousand jobs, above the consensus of 4.3.3 thousand. The unemployment rate fell sharply to 4.2%, down from 4.6%. The consensus for CPI for Q4 stands at 1.0%, after a gain of 0.8% in Q3. If this forecast is accurate, inflation would rise to 3.1% YoY, which would be just above the RBA’s target band of 2%-3%.

What are the implications for the RBA? The central bank did not expect unemployment to improve as quickly as it has, and a CPI gain of 1.0% or higher will put further pressure on bank policy makers to consider a rate hike. The markets have priced in a rise in the cash rate later in the year, but RBA Governor Philip Lowe has repeatedly stated that he won’t raise rates until unemployment has fallen to 4% and wage growth rises to 3%. Unemployment is close to that requirement, but wage growth is only at 2.2% and is unlikely to hit 3% until 2023.

It is entirely possible that the RBA is willing to let inflation continue to rise but will hold off on a rate hike until wage growth is at or close to 3%. I would therefore urge caution if Tuesday’s CPI reading is strong – the Australian dollar is likely to rebound, but I would be careful not to get caught up in any rate hike fever. At the same time, a robust CPI reading could result in the RBA ending its bond-buying scheme at the February meeting.

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AUD/USD Technical

• AUD/USD is putting pressure on support at 0.7138. Close by, there is support at 0.7101, protecting the round number of 0.7100
• There is resistance at 0.7245 and 0.7315

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