Today’s big fundamental release for Australia was the CPI data, released quarterly. The headline CPI reading on the quarter was 0.5%, which was in-line with expectations and slightly lower than the 0.6% in Q1.
However, the trimmed mean CPI, which excludes 30% of the most volatile items jumped to 0.8% on the quarter, up from 0.5% in Q1. This was also in-line with expectations.
Click to enlarge: AUS CPI breakdown for Q2 2014
(source: Australian Bureau of Statistics, ABS)
The key data point from today’s inflation report should be the 3.0% year-to-year reading. We have seen the CPI inflation rate rising from an annual rate of 1.2% low in Q2 of 2012. The Q1 reading was 2.9%, which was already elevated. The “target rate” is 2.0%. The elevated inflation data puts pressure on the RBA to raise rates, although it can’t do that unless the economy picks up steam as well. Still, faster inflation greases the wheel towards a rate cut and the AUD rallied accordingly.
The AUD/USD broke above July’s falling trendline. The 4H chart also shows that price is surging above a cluster of moving averages. This suggests the market has been sideways, but is now giving us a bullish signal. The RSI is pushing toward 70, which would establish bullish momentum, or at least a loss of the bearish momentum.
Given that the pair is bullish in the daily chart, the bullish breakout today suggests a test of the 2014-high around 0.95 with a strong likelihood to break higher and continue the prevailing trend, which was bullish.
As price nears the 0.9440-0.9450 area, it will face some common resistance from June, which caused a failed bullish attempt during the July 9 session. We can expect some near-term pullback especially if the 4H RSI shows a bearish divergence. Then we should monitor the 0.94 area for support. If price can hold above 0.94 after a pullback, and the 4H RSI can hold above 40 after poking through 70, then we have an even stronger case for the bullish continuation scenario.
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