The Australian dollar maintained its early gains following an increase in consumer price inflation (CPI) in Australia. In August, Australia’s CPI rose to 5.2% YoY, in line with expectations and higher than the previous month. While the monthly CPI figures are known to be volatile and not as significant as the quarterly CPI, the persistent high inflation poses a risk that the Reserve Bank of Australia (RBA) will maintain a hawkish stance in the near future. Former RBA chief Philip Lowe expressed concerns that wages and profits may surpass levels consistent with achieving the inflation target by late 2025.
Concerns about the Chinese economy and geopolitical tensions also weighed on sentiment, alongside rising US yields. Despite several support measures implemented by Chinese authorities, they have yet to trigger a meaningful turnaround in sentiment. Additionally, the Federal Reserve views the risk of inflation remaining higher than its target of 2% as a greater concern than the potential negative impact of higher interest rates on the economy.
From a technical standpoint, the AUD/USD rebound faced resistance at 0.6525, indicating a sideways to downward trend. Failure to surpass this resistance level could result in a minor double top formation and potentially push the currency pair towards the October 2022 low of 0.6170. Similarly, the AUD/NZD cross tested support at the July low of 1.0720, potentially signaling a move towards the May low of 1.0550. However, the overall range for AUD/NZD remains between 1.05 and 1.11, and a breakdown below 1.0550 would not necessarily shift the bias to bearish.
In conclusion, the Australian dollar held onto its early gains after an increase in CPI, fueling expectations of prolonged higher interest rates. However, concerns over Chinese economic growth and geopolitical tensions, as well as rising US yields, continue to affect market sentiment. From a technical perspective, AUD/USD faces resistance levels, while AUD/NZD tests a key support level.