Rising Australian inflation is unlikely to support the local currency

Today is marked by the Bank of Canada’s interest rate decision and Jerome Powell’s (i.e., Fed’s Chair) speech later in the North American session. Until then, however, one piece of economic data from Australia has moved markets and points to a phenomenon that will likely affect other economies, too – rising inflation.

Since reaching levels much higher than central banks’ targets, inflation has cooled off in the past months. In some countries, many traders hurried to call victory on the inflation front.

But that is not the case. In the United States, September data pointed to renewed price pressure. The same we’ve seen today in Australia.

Inflation in Australia surprised on all fronts.

First, the quarterly inflation surpassed expectations, reaching 1.2% vs. 1.1% expected. Second, the YoY inflation was also much higher than expected – 5.6% vs. 5.2%.

Finally, the Trimmed Mean CPI, which excludes 30% of the most volatile items, was 1.2% vs. 1%. Therefore, we can all say that inflation is showing its teeth again, likely to put the Reserve Bank of Australia on alert.

While the Australian dollar (AUD) did react to the news, the rally quickly faded. Moreover, a quick look at the technical picture on the daily timeframe reveals a bearish momentum against the US dollar.

Bearish technical picture for AUD/USD

Whenever inflation surprises to the upside, traders buy the currency. The idea is that they expect the central bank to increase the rates.

Higher rates lead to a stronger currency.

But the trick is that currencies are traded in pairs. A pair reflects the value of one currency in terms of another.

So, it very well may be that the inflation data is good news for the AUD, but if traders perceive the USD as better positioned, the currency pair, the AUD/USD, will decline.

Which is something that the bigger technical picture tells us.

The daily chart above shows the AUD/USD price action since the end of 2022. In October 2022, the US stock market bottomed.

Everything rallied against the US dollar.

Fast forward to Q1 2023, and the US dollar bottomed. Since then, the AUD/USD gave back almost all gains from the previous rally.

It sits in a bearish channel that points to the 0.6200 lows to be tested again.

Summing up, the bearish momentum will likely continue, with AUD/USD on track to break support in the 0.6200 area.