It's going to be a wild session for the Australian dollar

Getty/ Paula Bronstein

Following a sharp and sudden rally in late Asia — something that saw it jump to as high as .7560 — the Australian dollar eased lower in overnight trade, closing the session buying .7500, up 0.5% from Monday’s closing level.

The price action over the past 24 hours is shown perfectly in the 5-minute AUD/USD chart below.

While there was no clear catalyst to explain the sudden surge higher, one suspects that position squaring from traders ahead of key market events later in the week may have contributed to the move.

And that brings us to the key focus for Australian markets on Wednesday: Australia’s Q2 CPI report, released at 11.30am AEST.

It is arguably the most important data release for the broader Australian economy, and has the ability to surprise the markets, often leading to extreme levels of short term market volatility.

Given its importance to Australian interest rate settings — something that is bolstered by the knowledge that of the 29 rate movements that have occurred under Glenn Stevens’ tenure as RBA governor, 16 have directly followed a CPI report — it has the ability to rattle the Australian dollar.

Today is no exception, particularly given widespread expectations that RBA will likely cut interest rates to a record-low level of 1.5% when it next meets on August 2.

Outside of labour market slack, many other domestic indicators provide little evidence that the economy requires additional monetary stimulus, meaning that a lot is riding on the Q2 CPI release to justify current rate cut expectations.

“There’s no doubt that today’s outcome will be the key factor behind whether the RBA cuts rates at the August RBA Board meeting,” said Tapas Strickland, an economist at the NAB, in his morning note.

“The market is currently pricing around a 63% chance the RBA cuts rates next week, and the consensus CPI outcome for today is 0.4% q/q for both headline and underlying.”

For those who are looking to trade around the number, all the attention will be on the core inflation figure given its implications for the outlook for interest rates.

It will be this figure, not the headline CPI rate, that the Australian dollar will move off. For those looking for further information before the data is released, this 10-second guide will bring you up to speed.

Beyond the Australian inflation report, market attention will be squarely on the US Federal Reserve’s FOMC policy announcement that will be released at 4am AEST on Thursday.

“The US Fed meeting announcement tonight will be the other major focus for markets today,” says Strickland.

“While the Fed is likely to keep rates unchanged, the post meeting statement will be closely scrutinised to see whether the Fed is edging towards a rate hike at upcoming meetings given recent Fed commentary.

“Many of the ambiguities that the Fed cited in the June FOMC Minutes – the labour market and Brexit – have cleared following the stellar June payrolls print and limited spillovers from the Brexit vote on financial markets,” he says.

It’s going to be a big 24 hours, in other words, especially for the Aussie.

Here’s the current scoreboard, as at 7.55am AEST.

  • AUD/USD 0.7501 , 0.0001 , 0.01%
  • AUD/JPY 78.54 , 0.06 , 0.08%
  • AUD/CNH 5.0093 , -0.0005 , -0.01%
  • AUD/EUR 0.6825 , 0 , 0.00%
  • AUD/GBP 0.5708 , -0.0002 , -0.04%
  • AUD/NZD 1.0614 , -0.0012 , -0.11%

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