Australia will publish quarterly inflation data on Wednesday at 01:30 GMT amid a stepping up by the Reserve Bank of Australia in its efforts to spur price growth. The RBA has cut rates twice since June on slowing economic growth and stubbornly low inflation and so the latest readings on the consumer price index (CPI) will be dissected for clues on the prospect of additional easing by the central bank. The Australian dollar is looking highly vulnerable ahead of this week’s releases, which will also include producer prices and retail sales figures.
CPI to edge slightly up in Q2
Annual inflation in Australia has been running below the RBA’s 2-3% target band since the third quarter of 2018, dropping to 1.3% in the first three months of the year. Underlying measures of inflation have also drifted uncomfortably below the target band and the subdued picture isn’t expected to have changed in the second quarter.
The quarterly rate of CPI is forecast to have increased by 0.5% in the three months to June, while on an annual basis, CPI is projected to have accelerated slightly to 1.5%. That’s still well below the lower band of the RBA’s target and so it’s unlikely to satisfy policymakers who would like to see evidence of a sustained rise in headline inflation, preferably through higher wage growth.
Underlying inflation to stay muted
The two measures of underlying inflation are not anticipated to be of much comfort either for the RBA. The weighted median CPI is forecast to have stayed unchanged at 1.2% y/y in Q2, while the trimmed mean is expected to have eased slightly to 1.5% y/y.
Weaker-than-forecast numbers are likely to pressure the Australian dollar, which is struggling to hold onto the $0.69 level on rising odds that the RBA will continue to slash rates in the coming months. If the aussie closes below the $0.69 handle, it could next slip towards the 78.6% Fibonacci retracement of the January upleg at $0.6861, before diving to the 2019 low of $0.6743.
However, should the inflation data surprise significantly on the upside and take the pressure off the RBA to reduce rates further, the aussie could rebound to around $0.6954 – the 61.8% Fibonacci, before setting its sights on the 50% Fibonacci at $0.7019.
RBA expected to remain on easing path
But it will not be just the inflation numbers that aussie traders will be watching next week. Private sector credit figures are due at the same time as the CPI report, while on Thursday, Q2 producer prices are published alongside retail sales prints for both June and Q2.
All of these releases will come ahead of the August 6 policy meeting by the RBA when the central bank is expected to maintain a dovish tone. Although the RBA will probably hold off cutting rates again until the Autumn, an unimpressive set of figures would only reinforce the view that more cuts are on the way, especially after Governor Philip Lowe’s recent dovish remarks.
