09:34, 01 November

Relying on Support at 0.7050 after Inflation Softens

In the last week the AUDUSD has taken a breather and found solid support from 0.7050 as it has traded along that level, although it did drop a little lower reaching a 2½ year low a few days ago. After meeting resistance there for several days, the AUDUSD had slowly but surely eased lower from the key 0.7150 level before resting on the support at 0.7050. It was only several weeks ago that the AUDUSD reached a four-week high above 0.73 before the recent declines. The 0.7150 level has played a role in the last couple of months as it has bounced off this level several times, however it has now reversed roles. Up until this recent drop the AUDUSD had been quite content to trade around 0.74 and it previously made a few attempts to break through the resistance at 0.75 however all of these were thwarted.


During this period, the significant level at 0.75 loomed like a dark cloud. This same level has previously propped up the currency pair before being broken strongly mid June. Throughout June the AUDUSD has dropped very sharply from a one month high above the key 0.7650 level down to a new 12 month low around 0.7310. In the couple of weeks prior to this sharp drop, the AUDUSD has enjoyed some much-needed support from the key 0.75 level. It was only in early May that the AUDUSD was trading below this level and looking poised to continue much lower, so it did well to rally higher and get back above the 0.75 level.

Throughout the last couple of years the AUDUSD has traded within reasonably tight ranges of up to six cents, and in the last nine months or so we have seen it push higher to its highest levels in more than two years above 80 US cents. The 80 cents level however has provided a significant obstacle to the AUDUSD as it has met resistance there since the middle of 2017. Repeated attempts to push through the key 80 cents level were short lived and the AUDUSD quickly sold off moving it lower down to its current levels.

The Reserve Bank of Australia (RBA) is now highly unlikely to move interest rates at its next board meeting next Tuesday, after inflation softened to 1.9%. In fact, the change of a rate cut may have just increased.The 1.9% inflation figure is below the RBA’s target range of living costs increasing by 2 – 3% over the year.The consumer price index rose 0.4% over the September quarter, or 1.9% for the year. Underlying inflation has been below the RBA’s target band for 11 consecutive quarters as wage growth stays low. Underlying inflation is the RBA's preferred measure and removes volatile items such as food and fuel.Inflation results varied considerably across the capital cities and the data supports a view that a rate rise is some distance away, however the chances of am RBA rate cut are rising.It is a widely held view that the RBA won't raise interest rates until at least 2020 and now with the weak inflation, Sydney and Melbourne housing markets declining and weakness in wages growth, the conversation may soon turn to when the RBA will next cut rates.