Key Moments
- AUD/USD is trading close to the bottom of its recent 0.6900-0.7200 trading band.
- February headline CPI eased to 3.7% year-on-year, coming in just below consensus expectations.
- Markets currently reflect a 65% probability of a 25 bps RBA rate increase to 4.35% at the May 5 meeting.
Inflation Dynamics Support the Australian Dollar
Elias Haddad of Brown Brothers Harriman (BBH) notes that AUD/USD is hovering near the lower boundary of its recent 0.6900-0.7200 range. While February inflation data in Australia came in a touch softer than anticipated, Haddad sees scope for price pressures to intensify as higher energy costs feed into the broader economy.
According to Haddad, these evolving inflation dynamics are helping to limit downside for the Australian currency even as it trades near recent lows against the U.S. dollar.
February CPI Readings Slightly Undershoot Expectations
Recent inflation figures showed a modest downside surprise relative to forecasts. Headline and underlying measures both eased marginally compared with consensus estimates, though they continue to run above the Reserve Bank of Australia’s target.
| Inflation Measure (February) | Actual | Consensus | Comment |
|---|---|---|---|
| Headline CPI (y/y) | 3.7% | 3.8% | Dropped 0.1 percentage points from the prior reading |
| Trimmed mean CPI (y/y) | 3.3% | 3.4% | Unchanged for a third consecutive month |
Haddad highlights that the monthly CPI series is the main gauge of inflation in Australia. However, the Reserve Bank of Australia places greater emphasis on underlying inflation measures derived from the quarterly CPI when formulating policy.
RBA Remains Vigilant on Upside Inflation Risks
The RBA has recently underscored that inflation is still expected to stay above target for an extended period and that the balance of risks has shifted further toward the upside, including for inflation expectations.
The central bank also flagged that geopolitical uncertainty could intensify price pressures, stating that: “inflation is likely to remain above target for some time and that the risks have tilted further to the upside, including to inflation expectations.” The RBA also pointed out that “Developments in the Middle East remain highly uncertain, but under a wide range of possible scenarios could add to global and domestic inflation.”
Upcoming Data and Policy Outlook
Attention now turns to the upcoming Australian Q1 CPI release, scheduled for April 29. This data will arrive just ahead of the RBA’s next policy decision on May 5, where markets are currently pricing a 65% likelihood of a 25 basis point rate increase to 4.35%.
Haddad suggests that the prospect of stronger inflation driven by higher energy costs, combined with the RBA’s stated concern over upside risks, is helping to underpin the Australian dollar within its established range against the U.S. dollar.
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