Australian Dollar Gains Ground After Inflation Data Release

The Australian dollar saw a slight increase on Wednesday following the release of consumer price data that was marginally higher than anticipated. However, a crucial measure of core inflation experienced a slowdown, maintaining the possibility of an interest rate reduction in the upcoming month.

The headline consumer price index (CPI) showed a 0.9% rise in the first quarter, exceeding projections of 0.8%. This kept the annual rate stable at 2.4%.

The trimmed mean, which is a core inflation metric, decreased to 2.9% from 3.3%, surpassing expectations of 2.8%.

Notably, the core inflation rate has returned to the Reserve Bank of Australia’s (RBA) target range of 2% to 3% for the first time since late 2021. This development could potentially pave the way for an easing of monetary policy at the next RBA meeting scheduled for May 20.

Financial markets have largely factored in a 25 basis point reduction in the cash rate, currently at 4.10%. The likelihood of a more substantial half-point move, which was deemed improbable by central bank observers, has diminished.

Interest rates are projected to reach 2.85% or 3.10% by year-end. Market sentiment has shifted towards a more dovish stance following the announcement of tariff measures by US President Donald Trump, raising concerns about global economic growth.

Economic Analysis

Sean Langcake, who is the head of macroeconomic forecasting for Oxford Economics Australia, stated that the economy is anticipated to encounter a significant external demand shock starting from the second quarter.

Langcake added that with underlying inflation within the RBA’s target range, the central bank possesses greater flexibility to bolster the economy in response to the anticipated shock. He anticipates a 25 basis point cut in May, followed by two additional cuts during the latter half of the year.

The potential for further monetary easing led to a 2 basis point decrease in Australian 10-year bond yields, reaching 4.12%.

The Australian dollar experienced a slight strengthening, trading at $0.6395. It had previously reached a five-month high of $0.6450 before encountering profit-taking activity. Key support is observed around $0.6344, which needs to hold for another attempt at the upside.

The New Zealand dollar remained steady at $0.5929, having faced selling pressure around $0.5980 overnight. A breach of support at $0.6910 could lead to a deeper pullback towards $0.5825.

Market participants also anticipate a 25 basis point reduction in the Reserve Bank of New Zealand’s (RBNZ) cash rate, currently at 3.5%, when it convenes on May 28. Interest rates are expected to bottom out at 2.75% by October, moving into expansionary territory.

A recent ANZ survey revealed a decline in business confidence regarding the economic outlook in April, driven by concerns surrounding international trade.