AUD/USD, ASX 200: RBA on alert for another upside inflation surprise

• Australia’s monthly inflation indicator for May is out today
• Progress towards the RBA’s inflation target has stalled in 2024
• Trimmed mean measure is the most important figure for markets
• AUD/USD, ASX 200 nearing top of recent ranges ahead of the report

Australian markets need a catalyst to shake things up

AUD/USD and Australian ASX 200 SPI futures need a catalyst to shake things up, stuck in narrow trading ranges for much of the past two months. While those events usually arrive from offshore, don’t discount the ability for Australia’s monthly indicator for May to get things moving today.

Given the RBA is only debating whether to hold or hike rates right now, and with markets pricing a small risk that the next move in Australia’s cash rate will be higher rather than lower, another upside surprise – which has been the prevailing trend – could really get the inflation hawks in flap.

Australian inflation stalls at unacceptable levels

This chart from the Australian Bureau of Statistics (ABS) underlines why traders still favour the next move from the RBA to be a hike, with the disinflationary trend in annual Australian inflation measures stalling since the beginning of the year.

Source: ABS

In April, headline inflation rose 3.8% from a year earlier after seasonal adjustments, more than a full percentage point away from the 2.5% midpoint of the RBA’s inflation target band.

Underlying measures, including the trimmed mean figure which the RBA places great weight on, were even worse at 4.1% -- not only further away from the target but also moving further away relative to prior months.

Which makes today’s inflation report important

That makes the May update even more important, especially as it will capture far more price movements from services categories which is the RBA’s primary focus. Headline consumer prices are expected to lift 3.8% over the year, unchanged from April. There is no firm forecast for the trimmed mean or excluding volatile items measures, although a further acceleration from 4.1% would amplify the risks of the RBA hiking when it next meets in August.

AUD/USD coiling up, big break incoming?

For AUD/USD, a surprise of any form would be welcomed. As seen in the chart below, the Aussie has been rangebound between .6580 on the downside and .6700 on the topside for well over a month.

The narrowing range plays to the view that the AUD/USD may be coiling in a bull pennant pattern, pointing to the risk of a sizeable breakout at some point in the future. A decent upside surprise could do that, putting resistance between .6700 and .6730 under potential threat. However, anything more appears unlikely unless we see some unlikely strength coming through in other Asian currencies such as the Chinese yuan and Japanese yen.

On the downside, support is located at .6595 and again at .6580, the bottom of the range.

ASX 200 SPI futures an inverse play on inflation print

The technical picture is not dissimilar for ASX 200 SPI futures which are also coiling up within what looks to be a bull pennant pattern. 7845 and 7885 are nearby resistance levels with 7800, 7713 and 7685 the immediate support zone of note.

A downside surprise in the inflation report could see futures test and potentially break the top of the pennant while another hot outcome is likely to amplify selling pressure.

-- Written by David Scutt

Follow David on Twitter @scutty

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