Revisiting AUD/USD and Inflation Concerns
We are revisiting AUD/USD in this week’s chart of the day, supporting our overall bias. Australia’s inflation data has thrown a curveball, with the latest May figure rising to 4.0% year-on-year, surpassing the expected 3.8% and up from April’s 3.6%. This unexpected uptick comes after five months of stagnant inflation trends, derailing the progress made until December 2023 when the rate had dropped to 3.4% from the December 2022 peak of 8.4%.
May CPI: Unexpected Increase Sparks Concerns
The May Consumer Price Index (CPI) revealed an increase of 4.0% year-on-year, higher than the anticipated 3.8% and up from April’s 3.6%. This rise indicates that inflation is not just stalling but accelerating, reversing the downward trend observed in late 2023. Motor fuel prices dropped by 5.1% month-on-month in May, contributing to a 2.5% month-on-month decline in the transport component. However, this decline was expected, and other areas showed typical seasonal fluctuations, such as apparel and holiday prices.
Australia Manufacturing PMI: A Leading Indicator
Australia’s Manufacturing Purchasing Managers Index (PMI) showed a significant spike earlier this year, peaking at 50.0 in late April. However, it has since declined to 47.5 as of June 21, 2024. The PMI is a crucial leading indicator, often used to gauge the future direction of inflation such as the Consumer Price Index (CPI). This recent decline in the PMI suggests potential cooling in economic activity, which could influence upcoming inflation data.
Upcoming June CPI Report Holds Key to RBA’s Next Move
As the Reserve Bank of Australia’s (RBA) crucial 6 August meeting approaches, all eyes are on the upcoming June inflation report. The RBA needs clear evidence of declining inflation to avoid another rate hike. With retail gasoline prices rising in June, reversing May’s decline, and potential increases in seasonal holiday prices, the June CPI could rise by approximately 0.6% month-on-month. This would result in a slight year-on-year inflation decrease to 3.9%, but the quarterly trend remains concerning, showing inadequate progress toward the RBA’s inflation target.
Core Inflation Measures Offer Little Optimism
To find a reason for optimism, we examined the core measures of inflation. Unfortunately, the core inflation rates offer little solace. The trimmed mean inflation rate stands at 4.4% year-on-year, up from 3.8% in January, while the measure excluding volatile items is at 3.7%, up from 3.4% in January. The index excluding volatile items and holiday travel showed a slight drop to 4.0% in May from 4.1% in April, but this minor decrease does not significantly alter the overall inflationary pressure.
AUD/USD – Market Reactions and AUD Movement
The AUD/USD chart is currently showing interesting formations that indicate potential bullish momentum. After experiencing a downward channel, the price action has broken out and is now forming an ascending channel. This ascending channel suggests a possible continuation of the uptrend, with the key resistance level to watch at 0.6700.
The 4-hour chart reveals a clear resistance line at 0.6700, labeled “Resistance To Break.” This level has been tested multiple times, and a breakout above this resistance could signal a strong bullish move. If inflation continues to be an issue in Australia, it could provide further strength to the AUD, pushing the pair beyond this resistance zone.
Elliott Wave analysis indicates that we are in the midst of a wave (iii) of a potential five-wave impulse sequence. The completion of wave (ii) and the subsequent rise suggest that wave (iii) is in progress. Should this wave continue to develop as expected, we could see a significant rally towards the 0.6750-0.6800 region.
In summary, if inflation remains a persistent issue, the AUD could strengthen further, potentially breaking through the key resistance area at 0.6700. This breakout would confirm the continuation of the uptrend and open the door for higher targets in the coming sessions.
Key Levels to Watch:
- Support: 0.6620 (near the lower boundary of the ascending channel)
- Resistance: 0.6700 (critical resistance level)
- Higher Targets: 0.6750, 0.6800 (if resistance breaks)
Traders should monitor upcoming inflation data and RBA announcements closely, as these will be crucial in determining the next major moves for AUD/USD.
Conclusion
The latest inflation data has raised concerns about the effectiveness of current monetary policies in Australia. The RBA faces a tough decision at its August meeting, with the June CPI report being crucial. Without clear signs of declining inflation, the RBA may have no choice but to consider another rate hike. Investors and policymakers alike will be closely watching the upcoming data to gauge the next steps in managing Australia’s economic stability.
