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Australian Dollar Holds Strong After CPI Picks Up Speed; Future of AUD/USD, AUD/NZD?

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The Australian dollar maintained its early gains after consumer price inflation (CPI) in Australia rose last month. Australia’s CPI accelerated to 5.2% year-on-year in August, in line with expectations, indicating that interest rates may remain higher for a longer period. While monthly CPI figures are known for their volatility, this increase in inflation heightens the possibility that the Reserve Bank of Australia (RBA) will maintain a hawkish stance. However, it is important to note that the monthly CPI figures do not have the same relevance as the quarterly CPI figures from the RBA’s perspective.

Former RBA chief Philip Lowe recently stated that there is a risk of wages and profits surpassing levels that align with inflation returning to its target in late 2025. The RBA has already decided to keep the benchmark rate steady at 4.1% and believes that recent data supports the expectation of inflation returning to the target range of 2-3% by 2025. Market expectations currently include one more rate hike by the RBA early next year and no chance of a rate cut until 2024.

Despite the positive CPI figures, the Australian dollar still faces resistance, especially against the US dollar (AUD/USD). The currency rebounded but reached a crucial resistance level at 0.6525. If the AUD/USD fails to break this resistance, it is expected to remain range-bound or possibly move downwards. Additionally, the AUD/NZD pair is testing a key support level at the July low of 1.0720. A break below this level could potentially lead to further declines, but overall, the cross remains within the well-established range of 1.05-1.11.

In conclusion, the Australian dollar held onto its early gains after a rise in CPI, indicating the possibility of higher interest rates in the future. The RBA’s hawkish stance may continue as inflation remains at an elevated level. However, the Australian dollar still faces resistance against the US dollar and the AUD/NZD pair is testing a crucial support level. The outlook for the Australian dollar remains uncertain, with the potential for further downside if key resistance and support levels are not broken.

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