Australia CPI forecast to climb to 4.2% in September

• Australian Consumer Price Index expected to edge up in September
• A 0.3% MoM increase is forecast for Trimmed Mean CPI, the Reserve Bank of Australia’s preferred inflation measure.
• Against the US Dollar, the Australian Dollar is finding it difficult to hold the 0.7000 level. 

Australia’s September Consumer Price Index (CPI) is forecast to show annual inflation of 4.2%, compared with 4% in  August. The Australian Bureau of Statistics (ABS) will release the figures on Wednesday at 00:30 GMT. On a monthly basis, CPI is expected to rise 0.7%, following the previous month’s 0.4% increase.

Alongside the headline figures, the ABS will publish Trimmed Mean CPI, the inflation measure favoured by the Reserve Bank of Australia (RBA). Following an annual reading of 3.6% in August, attention turns to the monthly September figure, which is forecast to rise to 0.3% from 0.2%.

With the release approaching, the Australian Dollar (AUD) sits just a few pips above the psychological 0.7000 level against the US Dollar (USD). Risk aversion is lending support to the USD ahead of the Federal Reserve’s (Fed) monetary policy announcement. 

Australia’s inflation figures set the backdrop for RBA policy

Inflation informs monetary policy decisions at the RBA and other central banks. Maintaining price stability is central to the mandates of all major central banks, while some also seek to contain unemployment. For the RBA, the two principal objectives are low, stable inflation and employment for as many people as possible.

Despite Australia’s seasonally adjusted Unemployment Rate reaching a five-year high of 4.7% in September, policymakers appear more concerned about inflation than unemployment. As the September monetary policy statement put it, “The unemployment rate was now close to the assessment of full employment embedded in the August forecasts,” while members’ assessment of July inflation figures prompted staff to expect underlying inflation in the September quarter to exceed the August forecast.

The statement also notes: “Business liaison and surveys continued to record widespread reports of elevated cost growth and few expectations that those pressures would ease significantly over the year ahead,” 

According to the minutes, the Board unanimously backed a 25 basis point (bps) increase in the official cash rate target to 4.6% at its September meeting. With inflation still “too high,” it also kept open the possibility of further increases. 

Against this backdrop, the forthcoming inflation release should strengthen the argument for additional interest rate rises, keeping the AUD under pressure. 

A figure of at least 4.2% should lift AUD/USD. If inflation were to exceed March’s peak of 4.6% YoY, the Australian Dollar would be likely to receive a near-term boost. Conversely, a reading below 4% should temper expectations of rate increases and send the AUD lower. Sustained gains in the currency nevertheless look unlikely while oil prices remain close to fresh multi-month highs, particularly ahead of the United States Federal Reserve’s (Fed) monetary policy announcement.

Markets broadly expect the Fed to leave interest rates unchanged, although participants are pricing in a December increase. A surprise decision remains possible, however, given Chair Kevin Warsh’s reluctance to offer forward guidance. A hawkish message from the Fed also looks likely, leaving little prospect of a USD retreat. 

AUD/USD faces inflation test near 0.7000

September inflation is forecast to have edged higher, as noted above, leaving it well beyond the RBA’s 2% to 3% target range. Ahead of the figures, AUD/USD is trading only a few pips above 0.7000. 

Assessing the technical outlook, FXStreet Chief Analyst Valeria Bednarik says: “From a technical point of view, the AUD/USD pair is neutral-to-bullish according to the daily chart. The pair holds above a flat 20-day Simple Moving Average (SMA) while battling a mildly bearish 100-day SMA at 0.7030. Technical indicators, in the meantime, picked up modestly within positive levels, skewing the risk to the upside.”

On the key price levels, Bednarik continues: “The same chart shows that speculative interest is willing to buy on dips towards the 0.7000 figure, the immediate support level. A clear break below it exposes the 0.6930/50 area, ahead of 0.6880, July’s monthly low. AUD/USD would need to run past 0.7070 to gain upward momentum and advance towards its next resistance area at around 0.7130.”