Date: 31 Oct 2019

The chances of a December interest rate cut from the Reserve Bank of Australian increased on Wednesday after quarterly inflation data for the Australian economy came in weaker-than-expected. Third fiscal quarter CPI inflation came in at just 0.5 percent, missing the 0.6 increase that economists had been forecasting.

The latest inflation data from July through to September is not expected to prompt the Reserve Bank of Australia to cut interest rates in November. However, the Australian central bank is expected to strike a more dovish tone, given the emphasis placed by the RBA on persistent weakness in inflation.

Looking more closely at yesterday’s inflation data, core inflation came in at just 0.4 percent for the third quarter, while annual core inflation came in at 1.3 percent on a year-on-year basis. The Reserve Bank of Australia has a core inflation target of around 2.0 percent, further underscoring how far inflation continues to miss the central bank’s target.

Overnight cash futures are currently showing a ninety-five percent chance that the RBA will keep rates on hold next week, which has given the Australian Dollar a boost on the foreign exchange market. This is likely to be temporary, as the Australia Central bank may soon be discussing lowering the benchmark interest rate close to zero to combat inflation.

The Reserve Bank of Australia could also discuss unconventional monetary policy tools such as quantitative easing to bring inflation back to the target rate. A policy aimed at zero rates or QE is likely to have extremely negative implications for the Australian Dollar in the future and could plunge the AUD/USD pair below the $0.6000 level.

 

AUD/USD Daily Candlestick Chart | Source: ActivTrader

AUD/USD Daily Candlestick Chart | Source: ActivTrader

 

The Australian Dollar has been enjoying a comeback against the U.S Dollar lately, although the pair remains well below its 2019 opening price. Going forward, major resistance is located at the $0.6930 and $0.6960 levels. Technical pullbacks should expect to find dip-buying demand around the $0.6890 and $0.6850 levels leading up to the November rate decision.

 

Written by Nathan Batchelor, External Analyst, ActivTrades

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