The Australian dollar is seeing significant appreciation today, with the AUDUSD pair gaining nearly 0.55% after Australia's inflation data for May came as a sizable hawkish surprise. As a result, while the narrative in most developed economies is that interest rates will no longer rise, or at most begin to fall (as is the case with the European Central Bank or the Bank of Canada), expectations around the RBA suggest a possible rate hike at its next meeting in August, which is now priced in with more than a 50% probability.
- Australia's CPI inflation unexpectedly rose to 4% year-on-year, while analysts expected a reading of 3.8% and 3.6% in April. The prospect of rate cuts in Australia has receded, and with it, yields on 10-year Treasury bonds have risen to 4.32%; they are now 6 percentage points higher than the current '10-year' yield in the United States (4.26%)
- Rising inflation in Australia has fuelled a 6.5% y/y increase in electricity prices, which rose 4.5% y/y in April. Without government support, however, electricity prices would have been as much as 14.5% y/y higher.
- Food prices were 3.3% higher than a year ago - admittedly, less than in April (3.8%), but still far from the RBA's target
- Vegetable and fruit prices rose 4.4% and added to the higher reading. Real estate inflation rose 5.2%, and rental costs rose 7.4% y/y, Previously, the central bank of Australia (RBA) had indicated that it would not hike 14 in a row if it lost confidence in whether inflation would fall to 2-3% this year. May's inflation data certainly added to the uncertainty in this regard and signals that a hike may be on the table.
The rise of Australian CPI for May in the Trimmed Mean measure to 4.4% YoY is much above the RBA’s forecasts from the May Statement of Monetary Policy, where the bank expected 3.8% for June 2024. Bank can raise rates to 4.6% on August 6 meeting. Labour market and retail sales data are expected at 18 and 26 July, respectively. Yesterday, Canadian CPI inflation data also came in higher than expected.
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The AUDUSD pair is recording significant strengthening today, with the price once again bouncing above the 38.2 Fibonacci, retracement of the upward wave initiated on April 19. The first significant resistance is located at the level of 0.687, where we see significant previous price reactions. A rise above this level could open the pair's way above 0.7. The support level is marked by the 38.2 Fibo retracement and the 50-session SMA50 average (orange), which is located around 0.66.
Source: xStation5
