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With traders readying themselves for the Fed next week, we’ve seen much quieter action across markets this week. While there have been some noteworthy developments in terms of central bank comments and data releases, we didn’t quite get the volatility we’ve seen in the previous week. The calm before the storm maybe? Still, talking with traders ahead of the weekend it seems the move capturing the most attention is the rally in AUDUSD which rose almost 3% on the week. So, let’s take a look at what caused the move and, as ever, if you caught it. Well done! If you missed it? There’s always next week.
 

What Caused The Move?

Aussie Inflation Surprise

The main driver behind the rally in AUD this week was the surprise uptick in Australian inflation over the last quarter. Australian CPI jumped back up to 1.9% from 1.8%, quarter on quarter. However, the yearly figure was seen moving back up to 8.4% from 7.3% on the prior reading, well above the 7.6% the market was looking for.
 

RBA Tightening Expectations

On the back of the RBA recently pivoting on rates and signaling a desire to bring tightening to an end, the data struck a disappointing blow to the RBA. On the back of this release traders are now pricing in the likelihood of a larger RBA hike when it meets in February. The difficulty for the RBA is whether it chooses to hike by just a smaller .25%, banking on this latest spike as the result of one-off and temporary factors, or whether it steps up the pace of tightening to .5%+ and risks the harsher impact on the economy.
 

Upside Risks for AUD

With the BOC signaled that it will look to pause rate hikes over coming meetings and with the Fed well expected to hike by a smaller .25% next week, the data comes at an opportune time for the RBA and has seen AUD rising across the board. On the back of the data, AUD looks likely to remain well supported into the February meeting with upside risks that the bank hikes by a larger amount. The key then will be in its guidance and whether the RBA focuses on the fact this spike is likely due to transitory factors or whether it strikes a more concerned tone and signals the need to keep tightening in place longer than expected.
 

Technical Views

AUDUSD

(Click on image to enlarge)

The rally in AUDUSD has seen the market trading up to test the .7103 resistance level. While the price is currently stalled here, with retail traders heavily short the focus is on the further upside and a continuation towards .7287. If we see any correction lower from current levels, look for the channel lows to act as support ahead of the .6857 level.

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