Australian Q3 CPI Disappoints
The Australian Dollar came under pressure over the Asian and European session on Wednesday following a downside surprise in the Q3 CPI reading. Headline inflation rose 0.6% quarter-on-quarter, undershooting expectations of a 0.8% rise. On a seasonally adjusted basis the headline reading increased 0.4%, unchanged from 0.2% Q2 2017. Underlying inflation saw some moderation with trimmed mean inflation increasing 0.4% QoQ and weighted median inflation rising just 0.3%, down from 0.4% in Q1 and 0.5% in Q2.
The rate of inflation among tradables fell for the fourth consecutive quarter, declining 3.1% in Q3, which is the biggest drop since Q4 2014. The rate also turned negative on a year-over year basis which is the first time this has happened since Q3 2015. Non-tradables however, rose to a four year high at 3.5% mainly driven by a surge in utilities costs which is likely to continue to be a theme. Notably, the next quarter’s headline CPI reading will be based on new weightings which the Australian Bureau of Statistics has said it will release on November 6th.
The fall-back in inflation has seen the market unwinding the hawkish RBA expectations which have been building over recent months. Strong data recently had encouraged the view that the RBA would follow the general tide of hawkishness sweeping across most G10 central banks currently. However, the RBA have been careful to reiterate their cautious stance with governor Lowe noting that, while he sees the next rate move as an increase, it likely won’t be for some time and will be data dependant. RBA’s Harper however has recently said that he feels a further rate cut cannot be ruled out as weakened wage growth and house hold incomes present a challenge to the economy.
Market Reaction & Technical Perspective
AUD was heavily sold in response to the data which all but rules out a 2017 rate hike, which was the driver behind the bullish position. Price has now broken down below the local rising trendline and below the prior October low and is on course to test the 50% retracement from last year’s lows around .7614 ahead of deeper support at the 61.8% retracement level and the completion of a large ABCD pattern around .7525.
UK GDP Rises In Q3
UK GDP grew again in Q3 rising 0.4% quarter on quarter against the prior quarter’s 0.3% reading, with the annual figure unchanged at 1.5%. The Office of National Statistics in the UK noted that the country’s service sector was “the largest contributor to GDP growth, with a strong performance in computer programming, motor trades and retail trade”. The reading was also helped by the manufacturing sector which returned to growth this quarter, printing a strong 1%.
This latest data shows, once again, that the UK has avoided falling into the recession which many analysts and market participants forecast would happen following the Brexit referendum last year. The data has fuelled a further increase in hawkish expectations ahead of the BOE’s “Super Thursday” meeting in November. The BOE said at their last meeting that the majority of members feel a rate rise will “likely be appropriate in the coming months” if the economy continues to perform as expected. This data in line with the recent strength in inflation, which rose to 3% for the first time since 2012, makes a strong case for a November hike.
Market Reaction and Technical Perspective
The market reaction has seen GBP firmly bid as traders ramp up their November rate hike expectations. GBPUSD looks poised for further upside with a potential double bottom forming at the rising trend line support from last year’s lows. A break back above the local 1.3330s high should bring the year to date high back into focus.