The AUDUSD exchange rate was higher after the latest inflation data put rate cut hopes on hold.
AUDUSD – Daily Chart
The AUDUSD exchange rate rallied above 0.65 on Wednesday. Although the pair has given up some of those gains, it is still above support.
Markets were surprised by disappointing inflation numbers from Australia and moved to price in a minimal chance or around 4% of a rate hike by August.
The Australian Bureau of Statistics data showed that the consumer price index (CPI) rose 1% in the first quarter, above market forecasts of 0.8%. The annual pace of CPI inflation slowed to 3.6% from 4.1%, also higher than the forecast of 3.5%.
“It’s higher than we were expecting, higher than what the market was expecting, and higher than what the RBA would be expecting so that 1% number will be something that they’ll be alarmed about,” said Madeline Dunk, an economist at ANZ.
“I think the RBA will want to see those services and non-tradables numbers decelerate in Q2 and if we don’t see that there is a chance we see those rate cuts get pushed out to next year.”
Westpac pushed out the expected timing of the first rate cut from September to November, given the slower progress on disinflation and the healthy jobs market.
The Reserve Bank of Australia left interest rates at 4.35% during its last three meetings as confidence grew that inflation was on track to return to its target band of 2-3% by late 2025.
Investors have been reducing rate cut expectations globally as signs emerge that lowering inflation may not be as easy as initially thought.
The US economy will now deliver growth data on Thursday and the Fed’s favourite PCE consumption data on Friday, meaning the next week or two should have enough clarity for FX markets to trend.
Weakness in GDP could speed up rate hikes, but a stubborn PCE number would slow them down.
