Australian dollar falls despite CPI rise

• Australia’s CPI accelerates
• US PMIs show slight improvement

The Australian dollar rose about 40 basis points on Wednesday after Australia’s CPI surprised to the upside, but has reversed directions and is in negative territory. In the European session, AUD/USD is trading at 0.6335, down 0.32%.

Australia’s CPI accelerates

Australian inflation was hotter than expected in the third quarter and that could translate into the Reserve Bank of Australia hiking rates after four consecutive pauses.

Australian CPI rose 1.2% q/q in the third quarter, up from 0.8% in Q2 and higher than the consensus estimate of 0.8%. For September, CPI jumped 5.6% y/y, up from 5.2% in August. The trimmed mean, a key core CPI indicator, rose to 1.2% q/q, up from a revised 1.0% in September and higher than the consensus estimate of 1.1%. The fact that headline CPI and the trimmed mean both decelerated on an annual basis was cold comfort to the markets, which have raised the odds of a rate hike next month to 66%, compared to 35% a day ago.

The RBA remains hawkish over inflation, and Governor Bullock said on Tuesday that the RBA would increase rates if there was “a material upward revision to the outlook for inflation”. I’ll leave it to the number-crunchers at the central bank to determine if today’s inflation report meets that definition, but it’s clear that the upswing in inflation will put pressure on the RBA to raise rates at the November 2^nd meeting. Two major Australian banks, the Commonwealth Bank of Australia and ANZ switched their rate stance in the aftermath of the inflation report and are now projecting a quarter-point hike next month.

It wasn’t a spectacular upswing but US manufacturing and services PMI gained ground in September. Manufacturing PMI rose from 49.8 to 50.0 is September, above the market consensus of 49.5 and hitting a six-month high. The Services PMI rose to 50.9, up from 50.1 in September, above the market consensus of 49.8 and the highest level in three months. The PMI releases are the latest sign that the US economy has been able to weather the Federal Reserve’s tightening cycle.

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AUD/USD Technical

• AUD/USD has support at 0.6240 and 0.6184
• 0.6343 and 0.6399 are the next resistance lines

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