Australia Q3 inflation report preview: AUD/USD, ASX 200 SPI technical focus

• Australia’s Q3 CPI report released on Wednesday
• It’s realistically the last domestic data point that could meaningfully shift RBA rate pricing this year
• Markets and RBA expect trimmed mean inflation to lift 0.8% for the quarter, although many forecasters see a 0.7% print
• Full RBA rate cut not priced until May 2025
• AUD/USD remains a sell-on-rallies play
• Technical picture brightens for ASX 200 SPI futures

Overview

Australia’s Q3 inflation report is the sole remaining domestic data point that could meaningfully influence the outlook for interest rate settings from the Reserve Bank of Australia (RBA) this year, making Wednesday’s report a key event for AUD/USD and ASX 200 SPI futures traders.

This succinct guide will tell you what you need to know without unnecessary waffle, providing clarity for those looking to trade around the data when it arrives at 11.30am AEDT. 

Not every inflation measure is created equal

When it comes to market influence, one Australian inflation series stands above all others: the trimmed mean reading.

Whereas headline consumer price inflation (CPI) dominates political headlines, it’s the trimmed mean figure that’s far more important for markets. As the RBA’s preferred underlying inflation measure, it’s this figure that will drive moves in the Australian dollar, rates and equities on Wednesday.

Source: ABS

As the RBA explained in its Statement of Monetary Policy (SOMP) in August, using the trimmed mean measure allows it to “look through volatility in prices and the effect of one-off or temporary measures that do not influence the underlying degree of price pressures in the economy.”

It added that “measures of underlying inflation are more likely than headline inflation to reflect current inflationary pressures, as they generally provide a better indication of price changes across most goods and services.”

What is the trimmed mean measure?

Think of it as a haircut for the Australian Bureau of Statistics (ABS) consumer price inflation basket, removing the bottom and top 15% of price movements during the quarter. This provides a more accurate guide on underlying inflation trends, reducing the risk of false signals from one-off factors.

What’s do markets expect?

Of the 22 economists polled by Bloomberg, 11 look for trimmed mean to increase 0.8% in Q3 with 10 forecasting a smaller gain of 0.7%. One is forecasting a 0.6% outcome. Previously, trimmed mean increased 0.8% in Q2.

Headline inflation is tipped to lift 0.3% following a 1.0% gain in Q2, reflecting the impact of temporary state and federal electricity rebates.

What does the RBA expect?

The RBA's latest forecasts imply a quarterly increase in trimmed mean of 0.8%, leaving the year-on-year rate at 3.6%. Its headline inflation forecasts imply a 0.3% quarterly increase, leaving the year-ended rate at 2.9%.

Source: RBA

Australia’s expected interest rate path

Heading into the inflation report, market pricing implies a one-four chance of the RBA cash rate being reduced by the end of this year. Probabilities have been scaled back in recent months, in part due to ongoing strength in Australian labour market data and unwind of aggressive Fed rate cut pricing.

Looking further out, a full 25 basis point cut is not priced until May. A follow-up move is not expected until late September.

Source: Bloomberg

Assessing market impact scenarios (Trimmed mean QQ reading)

0.6% or lower: The outcome that would generate the largest market reaction. AUD/USD would likely come under significant downside pressure as traders move to price a strong probability of a RBA rate cut this year. Shorter-dated bonds and ASX 200 SPI futures rally aggressively.

0.7%: Similar market reaction to that above but to a lesser degree. Market timing for the first RBA rate cut likely to be brought forward to Q1 2025.

0.8%: Modest market impact given economist and RBA forecasts. Split between tradable and non-tradable inflation (essentially international and domestic-driven price pressures) likely to garner more attention, as will the services inflation measure. 

0.9% or higher: AUD/USD spikes as markets move to price in small risk of another cash rate increase. Shorter-date bonds and ASX 200 SPI futures tumble.

AUD/USD technical analysis

Source: TradingView

AUD/USD remains a sell-on-rallies prospect. The price continues to trend lower, taking out numerous supports along the way. RSI (14) and MACD are generating bearish signals on price momentum, reinforcing the bias to sell rallies and breaks.

Having broken through horizontal support at .6469 in early afternoon trade in Asia on Tuesday, the next major downside level of note is the long-running uptrend that dates back to the pandemic lows struck in early 2020. It’s currently located around .6500.

ASX 200 SPI futures technical analysis

Source: TradingView

The technical picture for ASX 200 SPI futures has brightened in recent days. While it’s yet to be completed, Tuesday’s daily candle looks like it may be a key bullish reversal, seeing the price break above the minor downtrend running from the record highs set earlier in the month. RSI (14) has also broken its downtrend, hinting bearish price momentum may be starting to turn. The signal is yet to be confirmed by MACD, though.

On the downside, support may be found at 8200 and again at 8150. Above, a break of minor resistance at 8293 opens the door for a potential retest of the record highs.

-- Written by David Scutt

Follow David on Twitter @scutty