Australia's release of third-quarter inflation data this week is likely to determine the fate of the AUD/USD into year-end.
The pair has been trending higher since the start of October, largely due to a dramatic rise in Australian bond yields and aggressive market pricing of interest rate hikes by the Reserve Bank of Australia.
The 10-year government bond yield soared to 1.86% last week from lows of around 1.05% on Aug 23. Refinitiv's RBAWATCH shows the market is pricing in two 25-basis-point rate hikes before the end of 2022, even as the RBA continues to signal it is unlikely to raise the cash rate before 2024 at the earliest nL1N2RL00F.
Economists at WestPac and CBA have noted that the market is running ahead of itself.
Unlike New Zealand, inflation pressures in Australia are not hot enough to force the central bank's hand in the time-frame the market predicts nL4N2R10I0.
The focus will be on core consumer inflation numbers Wednesday, with both the trimmed mean and weighted median expected to rise 0.5% quarter-on-quarter and 1.8% year-on-year.
If the data is within expectations, Australian yields are likely to correct lower, along with the AUD/USD. If the numbers are hotter than expected, the market will feel justified in defying the RBA's outlook, resulting in higher yields and a firmer Australian dollar.
Key AUD/USD resistance is at the 200-day moving average at 0.7562.
A benign CPI reading will likely confirm that level as a top and a drop back to 0.7350 would not surprise.
An unexpectedly high inflation reading would likely see the AUD/USD uptrend accelerate and the 200-DMA give way.
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