Aussie Dollar Rises Despite Second Consecutive Monthly Drop in Inflation

AUD/USD, NZD/USD Analysis

• Australian CPI drops in November allaying concerns of resurgent price pressures for now
• AUD/USD price action ahead of US CPI – longer-term uptrend in tact
• AUD/NZD tests resistance at 1.0740 and potentially the 200 SMA
• The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

Australian CPI Drops in November Allaying Concerns of Resurgent Price Pressures for Now

Inflation in Australia witnessed a welcome 4.3% rise compared to November last year, narrowly missing out on being the lowest increase in two years. Helped by drops in food prices and transport, mainly due to lower fuel costs. While November marks the second consecutive month of lower inflation, services inflation remains a concern for the RBA as rent inflation accelerated to 7.1% from 6.6% while electricity prices rose to 10.7%.

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Services inflation will continue to keep policymakers on their toes as they strive to see a repeat of rising inflation like we witnessed between July and September, leaving the RBA with little choice but to hike interest rates in November.

Given that Australia’s inflation timeline differs to that of the US and other developed markets, there is an expectation of fewer rate hikes from the RBA this year which may help support the local currency. Markets are expecting a mere 50 basis points worth of cuts this year, potentially starting in August.

Implied Interest Rate Probabilities

Source: TradingView, prepared by Richard Snow

AUD/USD Price Action Ahead of US CPI

The Aussie dollar appreciated despite the lower CPI print, a pattern which continued in the hours before the London session began. The US dollar index (USD benchmark) trades slightly lower this morning ahead of US CPI data tomorrow.

AUD/USD 5-minute chart

Source: TradingView, prepared by Richard Snow

AUD/USD continues within the longer-term uptrend but shorter-term price action has sent the pair lower. Today, AUD/USD appears to have found intra-day support at the significant long-term level of 0.6680 ahead of US CPI data tomorrow. A hotter-than-expected print could see a move below 0.6680 and even a retest of the ascending trendline acting as support, while continued disinflation in the US may provide a temporary boost for the Australian dollar which could see the pair recover a portion of recent losses.

AUD/USD Daily Chart

Source: TradingView, prepared by Richard Snow

AUD/NZD tests resistance at 1.0740 and potentially the 200 SMA

AUD/NZD has traded within a broader narrowing pattern, exhibiting periods of both consolidation and trend throughout. The trends have been notable but as we near the apex of the narrowing pattern, the potential for extended moves may lessen in the absence of a major catalyst. The Kiwi dollar has a superior yield differential and the pair has been less responsive to 10-year sovereign bond spreads. Both currencies remain affected by the economic misfortunes in China meaning price action is more likely to be impacted by country specific factors like net exports and overall market sentiment (AUD benefits from improved sentiment and higher moves in the S&P 500) .

1.0740 is the imminent level of resistance, followed by the 200 simple moving average (SMA). Support rests at the upward sloping trendline support. Keep an eye on US equity sentiment especially with renewed optimism around the semi-conductor/AI space.

AUD/NZD Daily Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX