Strong Aussie CPI lifts AUD USD to key juncture ahead of RBA Fed

The Australian dollar extended its rebound overnight after domestic consumer inflation data came out stronger than expected. The AUD/USD staged a quick rally to the key 0.7700 resistance area before drifting lower again during the European morning session. According to the Australian Bureau of Statistics, the Consumer Price Index (CPI) rose by 0.7% in the third quarter compared to 0.4% in Q2. On a year-over-year basis, CPI rose to 1.5%. Both measures of inflation topped expectations, though the core figure was in line. The ABS said that the most significant price rises over the quarter came from fruit and vegetables, due mainly to adverse weather conditions in major growing areas which impacted supply chains.

As such, these were temporary factors which means the Reserve Bank of Australia may ignore the rise in CPI and deliver a more dovish policy statement next week than expected. After all, the Aussie employment figures that were released last week were anything but strong. That being said, we don’t expect to see any rate cuts from the RBA this year. However, the Australian dollar could weaken nonetheless. Investors may started to dislike the AUD and other risk assets in general, due, for example, to concerns over U.S. elections, the release of some disappointing corporate earnings or if commodity prices tumble on the back of a rebound in US dollar. What’s more, the Federal Reserve is also meeting next week and there is a risk that it may send out the strongest signal yet about a December rate hike. If so, this should send the US dollar further higher, potentially causing AUD/USD to slump.

As we have noted previously, the Aussie continues to find resistance at or around the 0.7700-0.7770 area, so it could be at a turning point even though the moving averages are pointing higher and a bullish trend line is still intact. Several attempts to break above this area failed recently, which resulted in the formation of some bearish-looking price candlestick patterns. On the weekly chart for example (see the inset) a long-legged doji candle was created following last week’s price action. Similarly, a large bearish engulfing candle can be observed on the main daily chart. As the AUD/USD has not broken above last week’s high, so these bearish-looking candlestick formations remain valid for the time being. That being said, the low from last week at around 0.7580/90 area also remains intact, which also happens to be the 61.8% Fibonacci retracement against the most recent upswing. In addition, price is also holding above prior resistance, now support, at 0.7640.

So, while the AUD/USD may well drift further lower again from the noted 0.7700-0.7770 resistance area, for the selling pressure to accelerate the support levels at 0.7640 and then 0.7580/90 will need to break down soon. However, if the above resistance area gives way first then all bets are off. In this potential scenario the prior swing high at 0.7835 could be the initial stop ahead of the 0.8000 psychological level next.