AUD/USD rallied sharply following a stronger than expected inflation figure. Q4 CPI grew 0.8% Q/Q versus a 0.5% analysts consensus estimate. This made traders believe that the Reserve Bank of Australia will thus need to shelf off any immediate plans of rate cuts in order to prevent inflation from getting out of hand. As a result, AUD/USD pushed to above 0.886 almost immediately after the news, and stayed stable thereabouts for the rest of Asian session. Prices continued rally again during European session, suggesting that the hike in prices is not a knee-jerk response and we should not be expecting any immediate pullback any time soon.
Nonetheless, it should be noted that the degree of bullishness is surprising. Firstly, AUD/USD seldom move wildly following a CPI announcement, and today's response is one of the largest that we've seen in the past 2 years. Also, inflation rate isn't that high compared to previous quarter's of 1.2%. Even the degree of surprise is lower as previous quarter's expectations was a mere 0.8%. Hence, it is peculiar that the resulting bullish reaction is so huge when it actually pales in comparison to the data just before it.
Hourly Chart
AUD/USD Hourly" title="AUD/USD Hourly" height="242" width="474">
A plausible explanation to this may be that traders who are/wish to short AUD/USD are already at saturation point, and the short-squeeze allowed bullish response to be much more exaggerated. Hence, the long-term bear trend that is in line with weak Australian fundamentals should still remain, but the possibility for current bullish push to continue is still open, especially since prices have managed to clear the Channel Top. Should price manage to push above 0.89 round figure, we could even see bulls potentially hitting as high as 0.8925. If 0.89 is not broken, it is unlikely that the momentum brought by a combination of news over reaction and short squeeze can keep prices afloat for long. Therefore, it's a make or break situation for AUD/USD, clear 0.89 or we may see price start falling back towards 0.88 ceiling turned support and perhaps even Channel Bottom in the short-run. Stochastic agrees with Stoch curve already heavily overbought, hence downside scenarios will also be favoured.
Daily Chart
AUD/USD Daily" title="AUD/USD Daily" height="242" width="474">
Daily Chart is actually much more optimistic for bulls, with the potential to hit 0.90 if the new bullish cycle stoch signal turns out to be correct. However, even that will require a similar break of 0.89 round figure resistance before further bullish targets can be contemplated. Therefore, we are back to the same problem of the short-term; failure to break 0.89 will result in potentially swift bearish reprisal as the Evening Star pattern seen on 13th Jan will remain intact, pushing price to 0.877 and Channel Top in the long-term.