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AUS Q3 CPI and the AUD/USD Reaction

The Australian Bureau of Statistics released Q3 inflation data for Australia.
CPI q/q (Q3): 0.5%
Forecast: 0.4%
Previous: 0.5%


(click to enlarge; source: forexfactory.com)

Q3 headline inflation data seems to be better than forecast. It seems to be stabilized after dropping to 0.4% in Q2, and can be annualized to be 2.0%. In fact, the annual inflation in Q3 was 2.3%. Perhaps, the market did price in further downside in price pressure, because the reaction to this inflation report was AUD-bullish.

The thing is, today's inflation report does confirm a decline in inflation in 2014 as shown in the chart above. Also, another inflation measure shows the decline more dramatically in Q3.
Trimmed Mean CPI q/q (Q3): 0.4%
Forecast: 0.6%
Previous 0.8%

Now, as I mentioned, AUD/USD rallied after the release. It reversed a prevailing near-term downswing during the 10/21 session. This keeps price above the 100- and 50-period SMA and holds a slight bullish bias. The reaction 4H candle is a bullish outside bar. 

AUD/USD 4H Chart 10/22
(click to enlarge)

Because the data is not that convincing, we should be cautious of the AUD/USD rally. In the short-term there is upside especially if price breaks the triangle, but the 0.8895-0.89 area should be respected at first. A break above 0.89 then would suggest a more significant bullish correction. Otherwise, if price manages to return below 0.8750, we could be looking at a bearish continuation at least to test the 0.8642 low on the year, with downside risk toward the 0.86 handle in the short-term.