The Aussie dollar has reached fresh highs today after a stronger inflation report was released overnight.

As we mentioned yesterday, the increase in inflation in Australia, especially in Trimmed Mean inflation - the measure of price increases looked at by the RBA - suggests there are still price pressures in the system and the RBA can't take its foot off the monetary break just yet. Trimmed mean rose by a higher than expected 0.9% in the second quarter, pushing the annual rate to 2.7% from 2.3% in Q1.

This has pushed up Aussie interest rate futures, which measure interest rate expectations. The 3-month future rose 10 basis points in the aftermath of the report. This has also boosted the Aussie, which broke record highs today and is currently trading around 1.1070.

The RBA meets next week, it will be interesting to hear what it makes of the price data. Governor Stevens said earlier this week that there are some advantages to a strong Aussie, and we would expect the Committee to stick to this line and continue to talk up the currency as this may dampen inflation pressure.

What about the Aussie?

AUDUSD is looking overbought on an hourly basis, as you can see in the chart below. It may run into resistance around 1.1070 - a key resistance zone. But support lies at 1.1010. Although the Aussie is vulnerable to a resolution to the US debt crisis that could spark a reversal in the dollar, we think it will hold up better than other currencies against the greenback because of the fundamental factors supporting the Aussie. The next RBA meeting is on Tuesday 2 August. This outcome will determine the direction of the currency for the medium-term in our view.

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Kathleen Brooks| Research Director UK EMEA |

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