After it fell to its 11 year lows, AUDUSD traded higher in today’s Asian session following the better-than-expected CPI data from China. The currency pair is up by over 40 pips from its opening price as it trades around the 0.6700 handle.
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According to the National Bureau of Statistics of China, consumer inflation last month rose at its fastest annual pace since November 2011. The annualized CPI report for January 2020 came in at 5.4%. This reading came in as a surprise because the forecast was for a modest uptick of 4.5%. Meanwhile, the producer price index for the same month came in as expected at 0.1%.
Why was the CPI report bullish for AUDUSD?
Rising inflation is sometimes triggered by a pick-up in business activity. Therefore, market participants may credit robust business conditions for the surge in inflation in January. Consequently, AUDUSD benefited from the news because China is Australia’s largest trading partner. Forex traders often see positive Chinese data as positive for the Australian economy too, because they may imply more trading activity between the two countries.
However, I would take China’s stellar CPI report with a grain of salt. For one, the Lunar New Year may have driven the pick-up in business activity. Remember that the holiday fell on February in 2019. Therefore, the baseline for January is quite low from last year. Secondly, the coronavirus outbreak which started last month may have triggered some panic buying and a surge in prices.
What does this mean for the Aussie?
With that said, I do not expect the rally in AUDUSD to be sustained. By connecting the highs of February 5 and February 6, we can see that any upward movement on the currency pair could be limited by the falling trend line. The price around 0.6730 also coincides with the 100 SMA and 200 SMA. Lastly, when you draw the Fibonacci retracement tool from the high of February 6 to the low of February 7, we can see that the 61.8% Fib aligns with this price.
But, of course, this assumption may also be invalidated. Improving market sentiment which may be triggered by positive developments on the coronavirus outbreak would be bullish for AUDUSD. A strong close above the trend line resistance could then mean that the currency pair may have enough buyers to rally to last week’s highs at 0.6770.
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