Why is inflation in Australia causing the currency to rise?

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Market Watch review. 27.01.2021

In today's release, we’ll cover the following topics:

  • World Economic Forum in Davos. 
  • IFO Business Climate Index in Germany. 
  • UK labor market data. 
  • Consumer inflation data in Australia. 

The Economic Forum in Davos started on Monday, for the first time in half a century due to the coronavirus pandemic, is held in an online format.  
One of the interesting things is the session called Resetting Digital Currencies that took place on Monday. At this session, among others, the head of the Bank of England, Andrew Bailey, spoke and expressed his opinion on cryptocurrencies. 

He said that bitcoin and ethereum are unlikely to be the final settlement point, as the world needs more stable digital assets. Until that happens, traditional currencies will be more relevant. 

The IFO business climate index, calculated on the basis of a survey of German companies, came out worse than expected in January, falling from December 92.2 to 90.1 points.

IFO economists note that they expect the German economy to stagnate in the 1st quarter of 2021 due to lower consumer demand. 
This is also confirmed by the recently released business activity index (Germany Flash PMI), which also recorded a slight decline in business environment.

UK unemployment has hit its highest level in more than four years as the second wave of the coronavirus pandemic and tougher lockdown measures put more pressure on businesses and workers.

The final unemployment rate rose to 5% (more than 1.5 million people), thus reaching the highest level since August 2016. Before the outbreak of the pandemic in February, unemployment was 4%. 

Amid worsening statistics, the Chancellor of the British Treasury, Rishi Sunak, announced the extension of the subsidy program for residents until April 2021.  

The pound reacted to the publication of data and rhetoric with a significant increase — interrupting its fall, it rose by more than 120 points, while updating intra-week highs. 

The Australian and New Zealand dollars once again challenged resistance on the chart, as their US dollar fell and domestic data extended their recent habit of rising. 

Similar to New Zealand, published data on consumer inflation in Australia exceeded expectations. According to data released this morning, the consumer price index for Q4 2020 is up 0.9%.

However, core inflation rose just 0.4% for the quarter, still well below the Reserve Bank of Australia (RBA) target range of 2-3%. This can affect the incentives provided by the regulator. 

At the first meeting of the Central Bank, which will be held next week, there is a high probability of expansion of the stimulus program, which is a support for the growth of the Australian dollar (AUD).

Closely monitor the news background and be prepared for all the surprises of the market.

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