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Tomorrow at 12:30 am GMT Australia will print its CPI for the last quarter of 2017. Was the Reserve Bank of Australia (RBA) right to be a bit more optimistic on consumer prices?

Here are a few points you should note if you’re planning on trading the event:

What happened last time?

Australia’s CPI dominated the forex newswires last October, as it showed weak numbers all around.

Prices only grew by 1.8% from a year earlier in Q3 2017, which is weaker the expected (2.0%) and previous (1.9%) readings. On a quarterly basis, prices grew by 0.6%, which is faster than Q2’s 0.2% growth but below the 0.8% expected figure.

Meanwhile, RBA’s Trimmed Mean CPI maintained its 1.8% growth (vs. 2.0% expected) while the Weighted Mean CPI clocked in at 1.9% (also vs. 2.0% expected) after growing by 1.8% in Q2.

Apparently, there’s little price pressure outside of housing, energy, or health. Price increases were seen in electricity, tobacco, international holiday travel and accommodation, and new dwelling purchase, while prices fell for vegetables, automotive fuel, and telecommunication services.

Overall, the numbers pointed to more headaches for the RBA, which is already worried that rising household debt is outpacing real wages growth and is constraining growth in household spending.

Remember that the central bank currently expects inflation to remain low but “pick up gradually as the economy strengthens.

What are market players expecting this time?

  • Headline CPI to improve from 0.6% to 0.7%
  • Trimmed mean CPI (RBA’s preferred measure) to rise from 0.4% to 0.5%

Analysts generally expect both headline and core inflation to accelerate in Q4, as higher petrol prices and stronger housing and construction activity point to increases in overall prices.

They’re not expecting any significant increase, however. For one thing, RBA’s revised CPI weights implemented last November was significant enough to warrant a downgrade to the RBA’s inflation forecasts.

And then there’s tighter retail competition and tepid wage growth, which are expected to keep prices from consistently rising for a while yet.

Historical tendencies

How do Q4 reports usually print relative to market expectations and their previous readings?

Looking at the last 10 releases, we can see that Q4 headline CPI reports are just a tiny bit more likely to print downside surprises than better-than-expected figures.

Seasonality isn’t as iffy, however. In 9 out of the last 10 years, Q4 consumer prices have printed growth rates LOWER than their Q3 counterparts. BFD, since majority of analysts are expecting higher numbers this week.

How might AUD react?

RBA Governor Philip Lowe might not watch inflation as closely as his predecessor Glenn Stevens did, but inflation is one of the biggest (if not THE biggest) considerations in the central bank’s policy decisions.

This is why the CPI release could still dictate the Aussie’s intraday (or even intraweek) price action. Don’t believe me? Check out the last three CPI releases in 2017!

AUD 1-Hour Chart Overlay During Q1 2017 CPI Release
AUD 1-Hour Chart Overlay During Q1 2017 CPI Release
AUD 1-Hour Chart Overlay During Q2 2017 CPI Release
AUD 1-Hour Chart Overlay During Q2 2017 CPI Release
AUD 1-Hour Chart Overlay During Q3 2017 CPI Release
AUD 1-Hour Chart Overlay During Q3 2017 CPI Release

If core CPI prints at 0.5% as analysts believe, then the annual core CPI would register higher than RBA’s 2017 forecast of 1.75% and keep rate hike speculations alive.

But if it stays true to form and prints weaker consumer price growth compared to Q3 2017, then we might see an Aussie selloff that might last until the end of the day or week.

Or not. If you’ve read our latest market outlook, then you’ll know that the Donald will conduct his first State of the Union address not two hours after Australia’s scheduled CPI report.

As leader of the world’s largest economy, the POTUS could definitely move markets around and dictate risk sentiment during and after his speech.

That doesn’t mean you can’t trade the event, though! As you can see, the Aussie tends to react pretty strongly to data hits and misses during the release.

If you have a solid trading plan, then you can sneak in a pip or two (or fifty) from the event before markets price in the next catalyst!