Australia CPI Preview: Inflation figures could set the RBA path
- The Australian Monthly Consumer Price Index is foreseen at 3.8% YoY in June.
- Quarterly CPI inflation is expected to have risen at an annualized pace of 1% in Q2.
- The Reserve Bank of Australia will meet on August 6 to discuss monetary policy.
- The Australian Dollar retains its weak tone, trading against the USD at its lowest in two months.
Australia will publish fresh inflation-related figures on Wednesday, just before the Bank of Japan (BoJ) and the US Federal Reserve (Fed) monetary policy announcements. The Australian Bureau of Statistics (ABS) will release two different inflation gauges on Wednesday. Ahead of the announcement, the Australian Dollar (AUD) trades near a two-month low against the US Dollar, with AUD/USD changing hands just above 0.6500.
On the one hand, the ABS will unveil the quarterly Consumer Price Index (CPI) for the second quarter of 2024 and on the other, the June Monthly CPI, an annual figure that compares price pressures over the previous twelve months. It is worth remembering that the quarterly report includes the Trimmed Mean Consumer Price Index, the Reserve Bank of Australia's (RBA) favorite inflation gauge.
When it met in mid-June, the RBA kept the Cash Rate steady at 4.35%. Policymakers noted they discussed raising rates but ultimately opted to keep them on hold. The board refrained from ruling out a potential rate hike, and policymakers stated they would remain vigilant on inflation amid the unexpected uptick in price pressures in May.
What to expect from Australia’s inflation rate numbers?
The ABS is expected to report that the Monthly CPI rose by 3.8% in the year to June, easing from the 4% posted in May. The quarterly CPI is foreseen rising 1% QoQ and up 3.8% YoY in the second quarter of the year. Finally, the RBA Trimmed Mean CPI, the central bank’s preferred gauge, is expected to rise by 4% YoY in Q2, matching the reading from the previous quarter.
An unexpected increase in inflation figures through the first quarter of 2024 has not only pushed away the odds for an RBA interest rate cut but also revived speculation of a potential hike. Not only does inflation remain above the central bank’s goal, but it also unexpectedly rose in the first quarter of the year.
However, signs of sluggish growth have also become evident and the RBA is well aware of it. “Household consumption growth has been particularly weak,” according to RBA's May Monetary Policy Statement. Furthermore, the document shows that “Recent information indicates that inflation continues to moderate, but is declining more slowly than expected.” Finally, policymakers stated that “returning inflation to target within a reasonable timeframe remains the Board’s highest priority.”
In such a scenario, even with an unexpected uptick in price pressures, the case for a Cash Rate hike should be moderate. Still, speculative interest may opt to price it in, sending the Australian Dollar sharply up against most major rivals.
Softer-than-anticipated CPI figures, on the other hand, should lift the odds for an interest rate trim before year-end, and put the AUD under strong selling pressure.
How could the Consumer Price Index report affect AUD/USD?
The RBA will meet on Tuesday, August 6, and announce a fresh decision on monetary policy. This enhances the relevance of the CPI figures that will be the core of the Board’s decision.
At this point, it is worth remembering that multiple central banks have already trimmed interest rates or will soon do. If the RBA takes too long to cut rates or even chooses to hike them, the AUD may strengthen beyond reasonable to support local growth.
Ahead of the release of the CPI reports, the AUD/USD pair accumulated roughly 300 pips of straight losses from the peak set at 0.6797 by the end of June to the 0.6512 low posted on July 25.
Valeria Bednarik, FXStreet Chief Analyst, says: “The AUD/USD pair shows modest signs of bearish exhaustion after flirting with the 0.6500 figure, yet there are no technical signs of a directional change. The daily chart shows that the pair keeps developing below all its moving averages, with the 20 Simple Moving Average (SMA) heading firmly south above the longer ones. The immediate SMA is the 200, providing dynamic resistance at around 0.6585. Technical indicators, in the meantime, lack directional strength, consolidating at oversold levels.”
Bednarik adds, “The AUD/USD pair needs to extend gains beyond 0.6600 and remain above the level to kick-start a bullish correction. Whether it could continue upward will depend on a break above the 0.6690 level, the 61.8% retracement of the 0.6797/0.6512 slump. A break through the bottom of the range exposes the 0.6470 price zone, while below the latter, the pair could fall towards the 0.6400/30 area.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Economic Indicator
Monthly Consumer Price Index (YoY)
The Monthly Consumer Price Index (CPI), released by the Australian Bureau of Statistics on a monthly basis, measures the changes in the price of a fixed basket of goods and services acquired by household consumers. The indicator was developed to provide inflation data at a higher frequency than the quarterly CPI. The YoY reading compares prices in the reference month to the same month a year earlier. A high reading is seen as bullish for the Australian Dollar (AUD), while a low reading is seen as bearish.
Read more.Next release: Wed Jul 31, 2024 01:30
Frequency: Monthly
Consensus: 3.8%
Previous: 4%
Source: Australian Bureau of Statistics
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