- Australian inflation expected to slow in May
- The inflation report will have a significant impact on RBA decision in July
The Australian dollar is in positive territory on Tuesday. AUD/USD rose as high as 50 pips earlier but has pared these gains and is trading at 0.6685, up 0.16%.
The Australian dollar is showing some life after last week’s awful performance, in which it declined by 2.87%.
Markets eye Australian CPI
On Wednesday, Australia releases the monthly inflation report for May. Inflation is expected to ease to 6.1% y/y, down from 6.8% in April. If the consensus is accurate, this would mark the lowest inflation level since March. The Reserve Bank will be keeping close tabs on the inflation release, especially core CPI, which is a more accurate gauge of inflation trends. The core rate fell from 6.9% to 6.5% in April, but that is incompatible with a 2% inflation target, and the RBA will need to see core inflation fall much more quickly before it can think about winding up the current rate-tightening cycle.
The markets have priced in a rate pause from the Reserve Bank of Australia at 77%, and a significant drop in inflation on Wednesday should cement a pause at the July meeting. The RBA surprised the markets earlier this month when it raised rates by 25 basis points, bringing the cash rate to 4.35%. The minutes of the meeting indicated that the decision to hike was close, and a key factor in the decision was concern over persistently high inflation.
The central bank is well aware of the pain inflicted on households and businesses due to rising rates, and a pause in rate hikes would provide some relief, as well as allow the RBA to monitor the effects of its rate policy. At the same time, the central bank has made it absolutely clear that its number one goal is curbing high inflation, which means Wednesday’s inflation release could have a significant effect on the direction of the Australian dollar.
AUD/USD Technical
- AUD/USD put pressure on resistance at 0.6729 in the Asian session. Above, there is resistance at 0.6823
- 0.6598 and 0.6518 are providing support
