Australia CPI expected to rise to 4.2% in September

The Australian Bureau of Statistics (ABS) will release the September Consumer Price Index (CPI) on Wednesday at 00:30 GMT. The report anticipates inflation increasing to 4.2% from a year earlier, surpassing the 4% experienced in August. The monthly CPI is projected to be 0.7%, following the 0.4% recorded in the prior month. Additionally, the Trimmed Mean CPI, the Reserve Bank of Australia's preferred inflation measure, is expected to reach 0.3% in September, up from 0.2%.

Prior to the announcement, the Australian Dollar (AUD) trades slightly above the 0.7000 psychological level against the US Dollar (USD), as the latter strengthens due to risk aversion and ahead of the Federal Reserve (Fed) monetary policy announcement. Central banks, including the RBA, rely on inflation when making monetary policy decisions.

Price stability is a crucial component of all major central banks' mandates, alongside efforts to control unemployment. The RBA's two primary objectives are maintaining low and stable inflation, and ensuring maximum employment. The September monetary policy statement indicated that the unemployment rate, now near full employment levels, is less concerning than inflation.

The September monetary policy statement highlighted that the unemployment rate is close to full employment as forecast in August, while assessing that July inflation data led the staff to expect higher underlying inflation in the September quarter than previously forecast in August. The Board unanimously decided to increase the official cash rate target by 25 basis points to 4.6% in the September meeting, with the possibility of further hikes due to "too high" inflation according to the minutes.

A higher-than-expected inflation reading should support the case for additional interest rate hikes, keeping the AUD under pressure. A 4.2% or higher reading could strengthen the AUD/USD pair, while a surge past the 4.6% YoY peak in March might lead to a near-term AUD boost. However, with oil prices near fresh multi-month peaks, the chances of a sustained AUD advance are limited, particularly ahead of the US Federal Reserve's (Fed) monetary policy announcement.

The Fed is anticipated to keep interest rates steady, with market participants pricing in a December hike. Despite Chair Kevin Warsh's reluctance to provide forward guidance, a surprise move remains possible. Given the Fed's likely hawkish stance, there are minimal chances of a USD downside. As mentioned earlier, inflation above 2% typically results in higher interest rates, strengthening the currency, while lower inflation would weaken it.