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Inflation boosts RBA’s 2023 interest rate outlook


12 January 2023 Written by Stuart Cowell  HF Markets Head Market Analyst Stuart Cowell

Australia’s Monthly CPI indicator rose to 7.3% in the year to November, surpassing market forecasts of 7.2% y/y thus fuelling forecasts of further rate hikes in 2023. The most significant contributors to the rise came from housing (+9.6% y/y), food & non-alcoholic beverages (+9.4% y/y), transport (+9.0% y/y), furniture, household appliances & services (+8.4% y/y) and recreation & culture (+5.8% y/y). Source: https://www.abs.gov.au/

The inflation rate is a key factor considered by the RBA when deciding how soon and far to raise interest rates. The latest monthly data shows there are still ongoing inflationary pressures in the economy. Housing, which combines the cost of building new homes and rents, is one of the biggest contributors.

The Australian economy has been plagued by rising electricity prices, along with soaring petrol and diesel prices. Although it cut fuel excise temporarily for six months to help with this pressure on the economy, the fuel excise was restored to its original level on 29 September last year. Rising fuel prices have contributed to rising travel prices, including flights.

The longer running quarterly inflation report, which includes a wider assortment of items to calculate the CPI figure, is due out in 2 weeks’ time on 25 January, adjacent to the RBA’s first meeting of 2023. The RBA next meets on 7 February to decide whether to raise interest rates again. A renewed rise in inflation in November coupled with strong retail sales data is likely to encourage the RBA to press ahead with a 25 basis point rate hike at the February meeting. The current rate stands at 3.10%, and if the hike takes place it will make it 3.35% at the start of this year, 90 basis points adrift of the RBNZ which currently has its rate at 4.25%.

Technical Review

Despite being weighed down by the growth prospects of China as Australia’s major trading partner, the AUDUSD currency pair is still showing gains. In today’s trading, AUDUSD’s upside is still limited below the 0.7000 psychological level.  Intraday bias still remains neutral, as consolidation from the 0.6949 interim top continues. The outlook will remain bullish as long as the 0.6628 support holds.

A break of 0.6949 will resume the larger upside for the FE 61.8% projection at 0.7075 (from 0.6169–0.6892 and 0.6628 pullback) and 0.7135 resistance.

However, a strong break of 0.6628 will indicate a short-term reversal and turn the bias back to the downside. Technical indications on H4 still validate the pair’s upside movement, with the RSI at 58 and AO in the buy zone, and the pair’s price is also above the bullish Kumo and above the 200-period EMA. Overall, the 0.6169 rebound hasn’t run out of steam and is on an upside slope, only perhaps now limited below the 0.7136 resistance level.

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