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AUD/JPY Ready for Bullish Continuation after Strong Inflation Data

We had strong inflation data out of Australia to start the 7/23 session. The headline CPI reading leveled off, showing 0.5% inflation in Q2, which is down from the 0.6% in Q1, but is in-line with expectations. The trimmed mean CPI, which excludes the most volatile 30% items, came in at 0.8%, which was higher than the 0.6% in Q1. Again, this was expected. 


(soure: tradingeconomics.com)


Perhaps the most important data point was the rise in the annual CPI inflation rate from 2.9% in Q1, to 3.0% in Q2. This reflects a trend of rising inflation pressure that has brought the inflation rate up from the 1.2% low in Q2 2012. As the rate moves away from the 2.0% target rate, the RBA will be pressured to raise rates in order to keep the economy from run away inflation. The prospect of an earlier RBA rate hike should boost the AUD, and it did as we see in the AUD/JPY:

The AUD/JPY broke above July's trendline as well as clear above the 200-, 100- and 50-period SMAs in teh 4H chart. The RSI has tagged 70. Price action looks poised to test the 96.50 high on the year.

If price approaches 96.00 and the RSI shows bearish divergence, expect a pullback. Then, if the market is indeed developing a bullish continuation scenario, we should expect support in the 95.40-95.60 area, especially if the RSI approaches but holds above 40. 
At this point, only a break below 95.00 would suggest further consolidation, but even a break below 95.20 should spell trouble for the bullish continuation scenario.