AUD/USD bulls anxious at critical support ahead of Fed, looking for run to 0.6780/20
- RBA likely on hold gives some support to AUD that is otherwise in freefall below H&S.
- CPI data is supportive of AUD, but not supportive enough, yet, for RBA.
- AUD/USD bulls seeking the 0.68 handle but need to penetrate 0.6780 resistance structure.
AUD/USD has been rejected by the strong level of daily resistance structure around the highs of the day at 0.6777 and has subsequently dropped back to a low of 0.6735 despite a relatively robust Consumer Price Index report in Asia trade.
Following a lower rate in the unemployment data last week, surprisingly, AUD/USD barely reacted to the news that the fourth quarter CPI Headline beating market expectations by 0.1% on both the QoQ and YoY +0.7% QoQ vs 0.6% QoQ, and +1.8% YoY vs +1.7% YoY. The data, however, came in a touch below the 1.9% YoY Reserve Bank of Australia's forecast and still remains below the central bank's 2-3% target band.
AUD/USD was able to take some solace for the more important number, Trimmed Mean CPI that printed in annual terms at 1.6%, 0.1% above market expectations and the RBAs expectations for 1.5% YoY.
However, Trimmed mean inflation stayed at 0.4% QoQ, which saw the annual number unchanged at 1.6%. In its November SoMP, the RBA forecast trimmed mean inflation to be 1.6% y/y in December 2019. So this print of 0.4% was actually in line with the central bank's expectations and indicates that prices are tracking as expected.
All about Trimmed Mean
"With the strong headline number and probable rises in fruit and vegetable prices in Q1, we are likely to see an annual headline inflation rate comfortably above 2% in Q1 2020. However, we don’t think the RBA will respond to this until trimmed mean inflation starts to pick up considerably. And we don’t see that happening any time soon," analysts at ANZ Bank argued.
All in all, a 20 pip move was hardly meaningful vs the heavy supply we have seen below trend line support.
"In terms of breakdown, fuel, food, alcohol and tobacco were the biggest contributors to the rise in inflation with the drought pushing up food prices. Offsetting the gains was softness in housing cost inflation such as rent,"
– analysts at TD Securities explained in a breakdown of the data.
There are too many bearish fundamentals surrounding the Australian economy for bulls to really be convinced that the RBA will not cut rates in the near future. "These numbers, in addition to other recent economic data, give the RBA some flexibility around the timing of the next rate cut. ," analysts at ANZ argued.
There is still a 20% pricing chance that they will as soon as the Feb 4th meeting. Moreover, the data came a couple of sessions ahead of the Federal Reserve meeting today.
"Taken all together, this cements our view that an RBA move next week is materially less than a 50% probability. However, we think the RBA will eventually need to ease, if it is to drive the unemployment rate down further and get inflation back to target," the analysts at ANZ concurred with market sentiment.
Fed on hold, will they flip dovish?
How the Fed decision will affect the markets? Join our analysts to discover it!
Today at 18.30 GMT / 13:30 EST Valeria Bednarik and Joseph Trevisani will analyze market reactions to the Fed's decision. Is the Fed really comfortable with a wait-and-see stance? Stay updated here!