RBA backtracks on suggestions of higher interest rates as inflation stalls

Currencies like the Australian dollar could soon receive more buying attention

The annual rate of 1.8 percent was again short of the Reserve Bank of Australia's long-term target band of 2 percent to 3 percent, where it has been since the start of 2016.

This came as a surprise to most economists, with the consensus being a small uptick in the rate of inflation, and Kate Hickie, Australia & New Zealand economist at Capital Economics told Xinhua on Wednesday that the unexpected declines were due to lower prices.

Data from the Australian Bureau of Statistics revealed that pushing price increases in the last quarter were health care, taxes on tobacco and house buying.

When will Australian interest rates be raised?

Not so.The most recent PCE reading in the United States showed core inflation of just 1.5 per cent - below the Fed's 2 per cent target.

There is a Bank of England (BoE) interest rate decision next week which should provide an indication into their thoughts.

Forecasters to date point to a "perfect storm" for the Australian dollar bears including the softer USA dollar and upbeat economic data from China that helps send the iron ore price higher.

"We see further scope for the AUD/USD to correct lower - out short-term regression model implies a further 2% correction lower would be justified".

The sluggish print on inflation for the June quarter - a rise of only 0.2 per cent - sufficiently dampened expectations of a rate cut that the dollar followed the predictable path of immediately falling from US79.37 to US79.10.

I'd be surprised if the Fed said anything hawkish, however, the market is already dovish on the central bank so the main driver of the trade today will be the Australian CPI data. The protracted period of subdued inflation led the central bank to cut interest rates to a record low of 1.5 percent previous year and it has been on hold ever since.

There is enough evidence that the economy and labour markets are improving - albeit at glacial speeds - that it hasn't got the incentive to decrease rates. Full-time jobs made a remarkable comeback in June, gaining for a fourth month, while the unemployment rate steadied at 5.6%.

Given these macro outlooks, the RBA should be cutting rates instead.

Indeed, the latest numbers from the weekly report by the Commodity Futures Trading Commission implies that if hedge funds keep selling the greenback at this current rapid pace - it's been going on for nine straight weeks now - they will soon be "short" United States dollars for the first time since May 2016.

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