AUD/USD threatening key level on slow progress in taming underlying inflation pressures

• AUD/USD is testing downtrend resistance running from early 2022
• Australia’s latest inflation report revealed slow progress in lowering underlying price pressures
• The data keeps the risk of another RBA rate hike early next year on the table

Headline Australian consumer price inflation (CPI) undershot market expectations in October, although progress on taming underlying price pressures was disappointing, helping to boost AUD/USD.

Headline CPI may not reflect true inflation trend

According to the ABS, headline CPI rose 4.9% from a year earlier, down from 5.6% in the year to September and three-tenths below the 5.2% median economist forecast. However, the ABSA pointed out rebates for rents and electricity charges impacted the overall result, giving somewhat of a false impression of the overall inflation trend.

Beyond the headline figure than markets initially reacted to, the news on underlying price pressures was not good with CPI ex volatile items such as fuel, fresh food and holiday travel lifting 5.1% over the year, down from 5.5% in September but hotter than the sub-5% levels some forecasters had been looking for.

That, along with the disclaimer the monthly inflation indicator does not contain significant amounts of information on services prices – which is the area of concern right now – explains why the initial knee-jerk reaction in AUD/USD has been faded, putting the pair within site of key downtrend resistance. With the US dollar remaining under pressure, there’s every chance it could go unless upcoming US economic data fails to make the case for more than 100 basis points of rate cuts being priced in the United States next year.

Near-term price action key for AUD/USD

For those considering taking a position in AUD/USD around these levels, it may pay to watch the near-term price action for clues as to where it may head next. A clean break and hold above downtrend resistance located currently around .6670 would be a bullish development, potentially opening the door to a push towards minor resistance at .6720 and even the double-top of .6900 seen earlier this year. A failure to cleanly break this level may result in a near-term pullback towards support at .6600 and the 200-day moving average at .6582.

-- Written by David Scutt

Follow David on Twitter @scutty

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