The Australian Dollar was dealt a blow Wednesday after September inflation data missed expectations, weakening the case for bringing forward expectations of a Reserve Bank rate hike.

Headline CPI came out at 0.6% in September, up from 0.2% in the previous month according to Australian Bureau of Statistics data, although economists had forecast a rise to 0.8%

This amounts to an annualised growth rate of 1.8%, a disappointment for markets given economists had forecast headline inflation to return to the lower bound of its 2% - 3% target for the first time in two years.

Core inflation, which removes many of the more volatile items from the consumer price basket, was equally disappointing when September’s reading emerged at 0.4% against expectations for a growth rate of 0.5%.

The miss is significant because a return to target for inflation would eventually spur questions about how long the Reserve Bank of Australia can wait before it raises interest rates.

The Pound-to-Australian-Dollar rate rose an eye-watering 1.84% to 1.7192 during Wednesday’s session, while the Aussie currency fell against all of its G10 rivals.

Some strategists had already been betting that questions about a rate hike would come sooner rather than later.

“While we do not think that this alone will compel the RBA to shift to a more hawkish stance, it nonetheless plays into our view that AUD is one of the most underappreciated but very compelling macro stories and candidates for a sustained upside move,” wrote Mazen Issa, a strategist at TD Securities, ahead of the report.

“This CPI report along with next month’s employment and quarterly wages—both of which are poised to turn higher—sets the stage for what we think could be a material repricing of RBA expectations which is far too understated (currently the first rate hike is not priced until Q3-2018).”

Other strategists have been, and still are, less optimistic in their outlook for the Australian Dollar.

"I think AUD could continue to weaken as the market adjusts its expectations for Australian rates,” says Marshal Gittler, chief strategist at ACLS Global.

Gittler isn’t alone either as economists at Westpac have flagged further downside risks to the Australian inflation outlook.

"Broadly speaking the Australian economy appears to be locked in a low inflation environment where there are some sectors experiencing modest inflation, particularly around housing and health, but being mostly offset by deflationary pressure due to the competitive squeeze in consumer goods," says Justin Smirk, an economist at Westpac.

The rise in the Pound versus the Australian Dollar falls in line with Pound Sterling Live technical forecasts issued Monday, in which we forecast the exchange rate to rise out of a bullish chart pattern.

In that analysis, we noted that the daily chart (see below) shows a bullish flag pattern, "which would suggest a break higher is on the horizon and an extension of roughly the same length as the 'pole' is likely, with a probable end-target at the upper channel line at 1.7775."

After Wednesday’s upshoot from the poor inflation release the price has broken above the 1.7011 highs required to provide confirmation for a continuation higher to our next upside target at 1.7775. This move is now 'live'.

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