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AUD/USD Vulnerable to Weak 2Q CPI Report; Key Support Zones in Focus

AUD/USD Vulnerable to Weak 2Q CPI Report; Key Support Zones in Focus

2014-07-22 19:20:00
David Song, Strategist
Share:

- Australia Consumer Price Index (CPI) to Increase for Second Straight Quarter.

- Headline Inflation of 3.0% Would Mark the Fastest Pace of Growth Since 4Q 2011.

Trading the News: Australia Consumer Price Index (CPI)

Australia’s 2Q Consumer Price Index (CPI) may trigger a near-term breakout in the AUD/USD should the data print put increased pressure on the Reserve Bank of Australia (RBA) to normalize monetary policy sooner rather than later.

What’s Expected:

AUD/USD CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

Another uptick in the headline reading for inflation may undermine the neutral tone held by RBA Governor Glenn Stevens as price growth comes up against the upper bounds of the central bank’s 1-3% target band, and the AUD/USD may continue to mark fresh 2014 highs in the second-half of the year should a growing number of officials adopt a more hawkish tone for monetary policy.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Employment Change (JUN)

12.0K

15.9K

Westpac Consumer Confidence (JUL)

--

1.9%

Gross Domestic Product s.a. (QoQ) (1Q)

0.9%

1.1%

The pickup in the growth rate along with the improvement in the labor market may generate a strong inflation print, and heightening price pressures in Australia may heighten the appeal of the higher-yielding currency as it limits the central bank’s scope to further reduce the benchmark interest rate.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Retail Sales (MoM) (MAY)

0.0%

-0.5%

AiG Performances of Services Index (JUN)

--

47.6

Wage Cost Index (YoY) (1Q)

2.6%

2.6%

However, subdued wage growth paired with the downturn in private sector consumption may limit the upside risk for inflation, and a dismal CPI report may ultimately push the AUD/USD back down towards the key 0.9200 handle as it drags on interest rate expectations.

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How To Trade This Event Risk(Video)

Bullish AUD Trade: CPI Advances to Annualized 3.0% on Higher

  • Need green, five-minute candle following the statement for a potential long AUD/USD trade
  • If market reaction favors a long aussie trade, buy AUD/USD with two separate position
  • Set stop at the near-by swing low/reasonable distance from entry; look for at least 1:1 risk-to-reward
  • Move stop to breakeven on remaining position once initial target is met, set reasonable limit

Bearish AUD Trade: 2Q Inflation Report Disappoints

  • Need red, five-minute candle to consider a short AUD/USD position
  • Carry out the same setup as the bullish aussie trade, just in the opposite direction

Potential Price Targets For The Release

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AUD/USD Daily Chart

AUD/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • May Fail to Retain Current Range Should 2Q CPI Heavily Impact RBA policy outlook
  • Interim Resistance: 0.9500 (38.2% retracement) to 0.9520 (78.6% retracement)
  • Interim Support: 0.9330 (61.8% expansion) to 0.9340 (61.8% retracement)

Read More:

GBPJPY Eyes Major Inflection Zone- Weekly Opening Range in Focus

NZDCAD Testing Range Support Ahead of RBNZ- 9285 Key

Impact that Australia’s Consumer Price Index (CPI) report has had on AUD during the last release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

1Q 2014

04/23/2014 1:30 GMT

3.2%

2.9%

-65

-86

1Q 2014Australia Consumer Price Index (CPI)

AUD/USD Vulnerable to Weak 2Q CPI Report; Key Support Zones in Focus

Australia’s Consumer Price Index (CPI) climbed an annualized 2.9% in the first quarter after expanding 2.7% during the last three-months of 2013, while the core rate of inflation held steady at 2.6% amid forecasts for a 2.9% print. The weaker-than-expected CPI report dragged on the Australian dollar, with the AUD/USD slipping below the 0.9300 handle, and the higher-yielding currency struggled to holds its ground throughout the day as the pair closed at 0.9286.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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