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AUD/USD price forecast amid higher than expected inflation data

By:
on Oct 26, 2022
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  • Inflation reached 7.3% YoY in Australia and the RBA will hike some more
  • Housing and food prices lead the way higher
  • AUD/USD bounced from support and there is scope for the rally to continue

Overnight in Australia, traders eagerly awaited the monthly inflation data to be released. Inflation data worldwide matters because the market always tries to anticipate changes in the underlying trend.

In this case, Australian inflation data was particularly important given the previous Reserve Bank of Australia (RBA)’s decision. More precisely, in October, the RBA dropped the pace of its tightening to 25bp.

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One would argue that the move anticipated a change in the inflationary trend. Or, that inflation in Australia has already peaked.

Only it did not.

Today’s data shows that the prices of goods and services keep climbing. Therefore, it is hard to imagine how the RBA would ignore such a miss on inflation, and thus, the Australian dollar (AUD) moved higher across the board.

Housing and food prices drove inflation higher

YoY inflation reached 7.3% in Australia, with housing and food prices leading the way up. This is the highest print since 1990 and the RBA cannot remain indifferent to these changes.

In other words, today’s inflation data is hawkish for the Australian dollar because the RBA will try to play catch up. At the same time, the Federal Reserve of the United States suggested last week that it will slow down the pace of its rate increases, further contributing to a potential AUD/USD rally.

AUD/USD bounces from a strong horizontal support area

The AUD/USD exchange rate bounced from a strong horizontal support area seen around 0.6200. It appears as it had formed a triple bottom pattern, and the measured move points to further strength.

AUD/USD chart by TradingView

For most of October, the US dollar pushed higher. But support held and the AUD/USD reversed, trading now well above 0.65.

Ahead of the US midterm elections and in light of today’s Australian inflation data, there is scope for the AUD/USD exchange rate to rise further. Moreover, as the US dollar rallied all year, one should not be surprised to see some end-of-the-year profit-taking.

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