AUD/USD continues to rise after strong inflation numbers from Australia

• AUD/USD continues its recovery after Australian Q1 CPI data shows higher-than-expected inflation.
• The result is likely to keep interest rates higher in Australia for longer than other G10 nations.
• Bullish reversal signals are increasing on the charts, suggesting the possibility of a trend reversal in the making.

On Wednesday, the AUD/USD pair traded below the day's highs, just below 0.6500, after reaching a high of 0.6530 overnight, following the release of stronger-than-expected Australian inflation data , which showed that the increase in prices in the first quarter was greater than expected by economists.

The first quarter Consumer Price Index (CPI) rose 3.6%, instead of the 3.4% the market expected, and the price rigidity reflected in the data suggests that the Reserve Bank of Australia (RBA) will have even less likely to cut short-term interest rates.

The CPI data was a catalyst for an extension of the AUD/USD rally, as expectations that interest rates will remain high for longer are positive for the Australian Dollar. Higher interest rates mean more foreign capital inflows, which drives demand for AUD.

AUD/USD leads major currencies after CPI data

AUD/USD has seen three consecutive gains on Wednesday (so far), and is the best-performing G10 currency over a five-day period.

Due to persistent inflation, of which Wednesday's CPI data is further evidence, the RBA is seen as the last major G10 central bank to cut interest rates, according to Rabobank. In turn, this is likely to be a setback for the Australian Dollar.

“Prior to this morning's release of Australia's first quarter CPI inflation data, the market was already of the view that the RBA would be one of the last G10 central banks to cut rates this cycle. Today's data, higher than expected, reinforce this risk and highlight Rabobank's view that the next RBA easing cycle is likely to be very shallow,” Rabobank said in a note on Wednesday.

The higher-than-expected first quarter inflation rate is likely to force the RBA to revise upwards its inflation forecasts at its May meeting. Coupled with Tuesday's weak US PMI data, which put a dent in the myth of US economic exceptionalism, Rabobank is of the view that AUD/USD will continue to rise.

“Data released this week in the US and Australia have reinforced our view that AUD/USD is likely to continue an uptrend through the end of the year and into 2025.”

According to the bank, the RBA is now unlikely to make its first rate cut until November.

“Market implied interest rates currently point to a very small increase in the 6-month interest rate, reflecting increasing skepticism about the RBA's ability to cut rates this year. Rabobank's view is that the “RBA will only lower rates twice in the next cycle, starting in November,” Rabobank said.

TD Securities sees RBA cut in November unlikely

Analysts at TD Securities go further and discard their forecast for the RBA to cut interest rates in November, as they believe that a rate cut will not materialize until February 2025.

“We now expect the RBA to make its first cut on February 25. The RBA is likely to take a more aggressive stance, but is reluctant to act on it. Paying the RBA OIS on August 24 as insurance makes sense,” he says TD Securities.

If they are right, this is likely to drive AUD/USD even higher.

AUD/USD unlikely to rise unless US yields fall – Societe Generale

It is also important to keep in mind the other side of the AUD/USD pair: the US Dollar.

According to analysts at Societe Generale, the AUD/USD pair will remain stagnant, even after the stronger first quarter data, unless US yields lend a hand by falling as well.

“A pullback in US yields would still be needed for AUD/USD to break above 0.6500, even if the RBA is less likely to cut rates this year,” they commented.

Technical Analysis: AUD/USD Shows Signs of Bullish Reversal

AUD/USD is showing some early technical signals that point to a possible bullish reversal.

This is especially the case on the 4-hour and daily charts.

The AUD/USD daily chart shows a bullish Dragonfly Doji candlestick reversal pattern (circled) at the recent lows of Friday, April 19. This was followed by a bullish green day on Monday, providing bullish confirmation.

The bottom line is that AUD/USD is experiencing a reversal, albeit a short-lived one.

AUD/USD Daily Chart

If Wednesday ends with a bullish green candle, as seems likely, it will be further proof that the trend is reversing, since, according to technical analysts, three consecutive days of growth are a sign of trend reversal.

The AUD/USD 4-hour chart is also showing signs of a bullish reversal and the short-term trend has arguably reversed.

4 hour chart

The pair has broken above the last lower high of the downtrend at 0.6452 and broke above the 50-4-hour SMA. Both signals are bullish.

Furthermore, the accompanying MACD, during the recovery from the April 19 lows, has been strongly bullish, rising faster than it fell in a similar time period. This shows bullish enthusiasm and potentially institutional buyers could be participating.

The MACD has also risen above the zero line, adding more bullish evidence to the argument.

AUD/USD Weekly Chart

The weekly chart is the least bullish of the three.

AUD/USD seems to have formed a bearish three-wave pattern, with waves A, B and C. If this is the case, the pair could fall.

If this is the case, the pair appears to be in the middle of developing its wave C. Once wave C completes, the price is likely to undergo a reversal or at least a correction.

Typically, wave C is equal to the length of wave A or, more conservatively, a 0.618 Fibonacci ratio of A. If the latter is the case, wave C may have already completed. This would add weight to the bullish reversal thesis.

Otherwise, wave C is likely to continue falling. Although to interpret the chart it will be crucial to know whether the current week ends on a bearish or bullish note, judging by the pattern, it seems that the risk of further declines is still very much alive.