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The weak value of the Australian dollar might have reached the economy, raising import prices and pushing inflation numbers higher. The Australian Consumer Price Index rose by 0.8% in Q4, much higher than 0.5% expected. Trimmed Mean CPI (or core CPI) also exceeded expectations and rose by 0.9% instead of 0.6%.

AUD/USD immediately reacted and jumped from around 0.88 to 0.8860, and it continues climbing, as rate cut expectations are now trimmed. It is moving away from the recent 3 year lows.

The Reserve Bank of Australia is now stuck between a rock and a hard place: on one hand, it wants economic growth, and especially a transition from mining into other sectors. This requires a lower interest rate and a lower Australian dollar, to support exports.

On the other hand, and contrary to many other developed countries, inflation is not taking a break. The higher Core CPI is not only a result of lower import prices.

Up to this publication, at least one rate cut was foreseen later in the year, from the current historic lows of 2.50%. RBA governor Glenn Stevens talked about an exchange rate of 0.85 for AUD/USD.

Perhaps 0.90 is good enough to balance between growth and inflation?

Here is move on the chart:

AUDUSD climbing up after strong inflation numbers January 22 2014 technical one hour chart

The surprising rise triggered changes in analysis: from expectations for a rate cut, some even see a rate hike. It is more likely that the RBA will not hurry to make a move in either direction, but just change its statement accordingly. The next meeting is in early February.

0.8850 now switches to support, backed by 0.8780. Resistance is at 0.89, followed by the mighty level of 0.90, which proved to be very interesting in the past, triggering big bounces or big breakouts. For more, see the AUDUSD forecast.