AUD/USD eyes 2024 highs following another inflation upside surprise

• Australian CPI rose 3.5% in the year to July, down from 3.8% but above the 3.4% level expected
• The inflation report should be treated with extreme caution given limited information and one-off influences
• AUD/USD breaks to multi-month highs but struggling to extend

Overview

AUD/USD has broken to the highest level since early January, driven by a surprisingly strong monthly inflation report. However, the underlying detail suggests we may see a big deceleration in the annual rate next month, raising questions as to whether the move will stick with so many major risk events approaching on the horizon.

Australian inflation overshoots again*

Consumer price inflation was unchanged over the month, seeing the annual increase slow from 3.8% in June to 3.5%. Markets had expected a larger decrease to 3.4%. However, both the monthly and annual readings were augmented by state and federal electricity rebates which were introduced at different times across the country, making it difficult to assess the impact on the headline reading.

Only Queensland and Western Australia were included in the July report with the remaining states and territories starting in August, creating a scenario where we may see a far larger impact in the next inflation report, creating immediate downside risks.

Excluding fresh food and holiday travel, inflation rose 3.7% over the year, down from 4% in June. The trimmed mean series which eliminates the highest and lowest 15% of price movements in the inflation basket also experienced disinflation, decelerating from 4.1% to 3.8%.

The trimmed mean figure is the RBA’s preferred underlying inflation measure. Despite the latest slowdown, the current rate remains well above the 2.5% midpoint of the bank’s 2-3% target.

*But mind the fine print

It’s worth noting the first month of a new quarter contains very little new information on price movements for services, making it an incomplete picture as to overall inflation trends. Along with noise created by electricity rebates, traders should treat the release with a great degree of caution.

AUD/USD breaks above .6800

The initial reaction in Australian rates markets was to pare bets for a reduction in the RBA cash rate this year, with overnight index swaps for the RBA’s December meeting lifting from 4.068% to 4.123%, implying a 25 basis point cut is no longer regarded as a slam dunk.

That slight upward shift, along with the temptation of stop-loss orders layered above .6800, saw AUD/USD hit a session high of .6812, leaving it at levels not seen since early January.

However, the price has not been able to extend the move, increasing the risk the move may end up being a bull-trap. RSI (14) and MACD continue to generate bullish signals on momentum, so the Aussie very much remains a buy-on-dips play if we do see some form of reversal.

A break and hold above .6800 opens the door to a retest of a resistance zone between .6871 and .6893, including the downtrend that began in early 2021. On the downside, the pair should be well supported at .68612 and around .6715.

-- Written by David Scutt

Follow David on Twitter @scutty