Aussie extends rally as inflation outperforms

AUD/USD is sharply higher for a second straight day. In the European session, the Australian dollar is trading at 0.6484, up 1.412. After losing over 1% on Monday, the Aussie has roared back with gains of over 2.7%.

Australia’s inflation jumps to 7.3%

Australia’s inflation report is the driver behind today’s gains, as third-quarter inflation was stronger than expected. Headline CPI jumped 7.3%, its highest level since 1990. This was way up from 6.1% in Q2 and above the consensus of 7.0%. The key core inflation indicator climbed to 6.1%, up from 4.9% and above the consensus of 5.6%.

The unexpected rise in inflation upsets the apple cart for the RBA, which lowered its October rate hike to 0.25%, after four straight increases of 0.50%. The RBA would have liked to continue with a small hike at next week’s meeting and there has even been talk of a pause in rate hikes. The hot inflation report changes this thinking dramatically. It’s difficult to see how the RBA can ignore the jump in inflation, which is a painful reminder that inflation is yet to peak. The central bank will likely have to respond with a 0.50% increase, and the Australian dollar has soared today as a result. As the inflation report is the last key release before next week’s meeting, the RBA won’t have any additional data which could temper the need for a 0.50% hike.

The RBA will have little choice but to continue with oversize rates until inflation is beaten, which could take a while yet. The central has projected that inflation will hit 7.5%, with some analysts expecting it to rise closer to 8.0%. That means that the cash rate, which is currently at 2.6%, is unlikely to peak until it rises to 3.5% or slightly higher.

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AUD/USD Technical

• AUD/USD continues to test support at 0.6250. The next support level is 0.6121
• There is resistance at 0.6331 and 0.6460

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This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

A highly experienced financial market analyst with a focus on fundamental analysis, Kenneth Fisher’s daily commentary covers a broad range of markets including forex, equities and commodities. His work has been published in several major online financial publications including Investing.com, Seeking Alpha and FXStreet. Based in Israel, Kenny has been a MarketPulse contributor since 2012.

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