Will Australia’s CPI rise to 4.2% in September as expected?

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

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

Also due from the ABS is the Trimmed Mean CPI, the preferred inflation measure of the Reserve Bank of Australia (RBA). Following August’s annual reading of 3.6%, attention will turn to the monthly figure, which is expected to increase to 0.3% in September from 0.2%.

Risk aversion and the approaching Federal Reserve (Fed) monetary policy announcement are supporting the US Dollar (USD). Ahead of the inflation release, the Australian Dollar (AUD) is trading only a few pips above the psychological 0.7000 level against the USD. 

What could Australia’s inflation figures reveal?

Inflation guides monetary policy decisions at the RBA and other central banks. While price stability forms a core part of every major central bank’s mandate, some also seek to contain unemployment. For the RBA, the two main goals 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 focused on inflation than on joblessness. 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’ review of July inflation figures prompted staff to expect underlying inflation in the September quarter to exceed the August forecast.

The statement also says: “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, inflation remaining “too high,” meant further rate increases were still an option after the September meeting. At that meeting, the Board unanimously backed a 25 basis points (bps) increase in the official cash rate target to 4.6%. 

Against this backdrop, the forthcoming inflation data should reinforce the argument for additional interest rate increases, keeping pressure on the AUD. 

For AUD/USD, an inflation reading of at least 4.2% should provide an upward push. Should inflation move beyond March’s 4.6% YoY peak, the Aussie is likely to receive a short-term boost. Conversely, a figure below 4% should temper rate-hike expectations and drag the AUD lower. Sustained gains in the currency nevertheless look unlikely while Oil prices remain close to fresh multi-month highs, particularly before the United States Federal Reserve’s (Fed) monetary policy announcement.

Although market participants are pricing in a December rate increase, the Fed is widely expected to leave interest rates unchanged at this meeting. A surprise decision cannot be ruled out, however, given Chair Kevin Warsh’s reluctance to offer forward guidance. Moreover, a hawkish message from the Fed is likely, leaving little scope for a USD retreat. 

Can the Consumer Price Index release shift AUD/USD?

With AUD/USD trading just a few pips above 0.7000 ahead of the release, attention remains on September inflation. As noted earlier, it is forecast to edge higher and remain well above the RBA’s 2% to 3% target range. 

On the technical outlook, FXStreet Chief Analyst Valeria Bednarik observes: “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.”

Turning to key price levels, Bednarik says: “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.”