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Record-Low Australia Core CPI to Cast Bearish AUD/USD Outlook

Record-Low Australia Core CPI to Cast Bearish AUD/USD Outlook

David Song, Strategist

- Australia Consumer Price Index (CPI) to Narrow for Second Consecutive Quarter.

- Core Inflation to Slow to Annualized 1.5%- Slowest Pace of Growth Since Series Began in 1983.

For more updates, sign up for David's e-mail distribution list.

Trading the News: Australia Consumer Price Index (CPI)

Another slowdown in Australia’s headline & core Consumer Price Index (CPI) may trigger fresh monthly lows in AUD/USD as it puts increased pressure on the Reserve Bank of Australia (RBA) to further support the rebalancing of the real economy.

What’s Expected:

DailyFX Calendar

Click Here for the DailyFX Calendar

Why Is This Event Important:

The RBA may continue to embark on its easing cycle and cut the benchmark interest rate at the next policy meeting on August 2 as Governor Glenn Stevens and Co. warns inflation is ‘still expected to remain quite low for some time given very subdued growth in labour costs and very low cost pressures elsewhere in the world.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

NAB Business Confidence (2Q)

--

2

Retail Sales (MoM) (MAY)

0.3%

0.2%

Wage Price Index (YoY) (1Q)

2.2%

2.1%

Waning business confidence accompanied by the slowdown in household consumption may drag on price growth, and a fresh record-low reading for the core rate of inflation is likely to drag on AUD/USD as it fuels speculation for additional monetary support.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Full-Time Employment Change (JUN)

--

38.4K

Consumer Inflation Expectations (JUN)

--

3.5%

Gross Domestic Product (YoY) (1Q)

2.8%

3.1%

However, the ongoing improvement in the labor market paired with signs of a stronger-than-expected recovery may encourage sticky price growth in Australia, and a positive development may spark a near-term rebound in AUD/USD as market participants scale back bets for an RBA rate-cut.

How To Trade This Event Risk(Video)

Bearish AUD Trade: Headline & Core Inflation Slows in 2Q

  • Need red, five-minute candle following the print for a short AUD/USD trade.
  • If market reaction favors a bearish aussie position, sell AUD/USD with two separate lots.
  • Set stop at the near-by swing high/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.

Bullish AUD Trade: Australia CPI Tops Market Forecast

  • Need green, five-minute candle to consider a long AUD/USD position.
  • Carry out the same setup as the bearish aussie trade, just in reverse.

Potential Price Targets For The Release

AUD/USD Daily

AUD/USD Daily Chart
  • AUD/USD may work its way back towards the top of its recent range as it largely preserves the upward trend from the end of May, but the bearish divergence in the Relative Strength Index (RSI) may undermine the near-term rebound in the exchange rate, with a closing price below 0.7450 (38.2% retracement) opening up the downside targets.
  • Key Resistance: 0.7848 (June 2015 high) to 0.7860 (61.8% expansion)
  • Key Support: 0.6826 (2016 low) to 0.6830 (161.8% expansion)

Check out the short-term technical levels that matter for AUD/USD heading into the report!

Avoid the pitfalls of trading by steering clear of classic mistakes. Review these principles in the "Traits of Successful Traders" series.

Impact that the Australia 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 2016

04/26/2016 01:30 GMT

1.7%

1.3%

-87

-169

1Q 2016 Australia Consumer Price Index (CPI)

AUD/USD 5-Minute Chart

AUD/USD Chart

Australia’s Consumer Price Index narrowed more-than-expected in the first-quarter of 2016, with the headline reading slipping to an annualized 1.3% from 1.7% from the last three-months of 2015, while the core rate of inflation slipped to 1.7% during the same period amid forecasts for a 2.0% print. A deeper look at the report showed education costs falling 0.4% to lead the decline, with prices for clothing & footwear narrowing 0.1%, while transportation costs increased another 0.1% after rising 0.6% in the fourth-quarter of 2015. The Australian dollar struggled to hold its ground following the soft inflation report, with AUD/USD slipping below 0.7600 handle to end the day at 0.7584.

Get our top trading opportunities of 2016 HERE

Read More:

S&P 500: Sharply Unchanged, Consolidating or Topping?

COT-British Pound Ownership Profile Warns of a Bottom

Post-Brexit NZDUSD Support Vulnerable to Weak NZ Trade Balance

USD/JPY July Recovery at Risk on Wait-and-See FOMC/BoJ Policy

--- Written by David Song, Currency Analyst

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

To be added to David's e-mail distribution list, please follow this link.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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