The Australian Bureau of Statistics (ABS) will publish the high-impact Consumer Price Index (CPI) for May on Wednesday at 01:30 GMT.
Heading into the inflation test, the Australian Dollar (AUD) is at its lowest level in two months against the US Dollar (USD), having surrendered the 0.7000 psychological mark.
What to expect from Australia’s inflation rate data?
Australia’s annual CPI is expected to rise by 4.4% in May after increasing by 4.2% in April, inching close to the near three-year high of 4.6% seen in March. The monthly CPI is seen declining by 0.3% in the same period, following a 0.4% growth reported previously.
The Trimmed Mean CPI inflation is likely to pick up slightly to 3.5% year-over-year (YoY) in May from 3.4%, while the month-over-month (MoM) figure is set to hold steady at 0.3%.
The inflation data release comes after the Reserve Bank of Australia (RBA) held the Official Cash Rate (OCR) at 4.35% last week, pausing after three consecutive rate hikes since the beginning of the year.
The RBA stated that the “board remains focused on ensuring that inflation does not become embedded once the impulse from higher oil prices has passed through.”
“The board will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions,” the central bank further noted.
Since the RBA monetary policy meeting, geopolitical tensions have eased somewhat. The United States (US) and Iran struck a peace deal, sending Oil prices sharply lower. That could help alleviate the pressure on Australian inflation in the months ahead.
The divergence between the monthly and annual figures could be justified by a roughly 12% fall in fuel prices over the month amid easing global oil prices and a domestic fuel excise cut, which is set to expire this month.
Meanwhile, new dwelling costs and rents are expected to provide upward pressure on housing inflation.
However, the Trimmed Mean measures will be closely scrutinized to assess whether second-round pass-through from the Middle East energy shock is broadening into the wider services and housing basket.
The RBA closely watches this underlying inflation trend for policy signals.
How could the Consumer Price Index report affect AUD/USD?
AUD/USD is languishing below 0.7000 in the run-up to the inflation showdown, with buyers awaiting a surprise uptick in the annual and monthly Trimmed Mean CPI inflation data to rescue the Australian Dollar.
A softer headline driven by sharply lower fuel prices, but stubbornly high underlying inflation, will keep the RBA on high alert and hopes for rate hikes alive.
On the other hand, easing inflationary pressures in Australia would push back against expectations of the RBA resuming rate hikes late this year, further weighing on the AUD.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, highlights key technical levels for trading AUD/USD on the CPI release.
“The pair is maintaining a bearish near-term bias as it holds beneath the 21-day, the 50-day and the 100-day Simple Moving Averages (SMAs), clustered between 0.7070 and 0.7135. The pair sits only above the 200-day SMA at 0.6855, which acts as the last meaningful layer of trend support, while the Relative Strength Index (RSI) at 32 is approaching oversold territory, hinting that downside momentum is stretched but not yet exhausted.
On the topside, initial resistance is aligned with the 21-day SMA at 0.7077, followed closely by the 100-day SMA at 0.7085, with the 50-day SMA higher up at 0.7136 reinforcing a broader cap on recovery attempts. On the downside, the 200-day SMA at 0.6855 is the key support to watch; a decisive break below this longer-term measure would likely open the door to a deeper bearish extension in the coming sessions”.
(The technical analysis of this story was written with the help of an AI tool.)
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
