The Impact of Australian CPI Data on AUD/USD
AUD/USD experienced a brief uptick following the release of higher trimmed mean CPI data from Australia in October. Despite headline CPI figures hitting multi-year lows, attributed to lower energy and fuel prices, the currency pair saw further gains due to speculation of a potential rate cut by the Federal Reserve in December.
AUD/USD Daily Chart
Understanding the Relationship Between Central Bank Interest Rates and FX Valuations
- The differential between central bank interest rates plays a crucial role in determining FX valuations.
- Countries with higher or stable interest rates compared to their peers tend to see appreciation in their currencies.
AUD/USD’s rise can be attributed to contrasting monetary policies between the Reserve Bank of Australia (RBA) and the US Federal Reserve (Fed). The likelihood of a Fed rate cut in December, combined with previous cuts this year, has contributed to the currency pair’s performance.
The CME FedWatch tool indicates a 66.5% probability of a 25 bps cut by the Fed in December, reinforcing the AUD’s position against the USD.
Analysis of Australian CPI Data
Although Australian monthly Consumer Price Index (CPI) remained stagnant at 2.1% in October, with the Trimmed Mean CPI showing a slight increase to 3.5%, the data fell below economist forecasts. The decline in headline CPI was primarily driven by lower energy prices and global oil price trends.
- Energy prices, including petrol, saw significant drops, impacting headline inflation figures.
- Trimmed mean CPI, a more stable indicator, rose slightly, indicating underlying inflation trends.
Despite the disappointing headline CPI, the RBA is unlikely to adjust interest rates based on these transitory factors. Analysts suggest that the central bank focuses more on quarterly inflation figures for policy decisions.
“RBA cash rate futures imply a potential rate cut to 4.10% in May 2025, but the RBA is expected to maintain rates at the upcoming meeting,” noted Elias Haddad, Senior Markets Strategist at BBH.
Overall, while the Australian CPI data had minimal impact on the AUD/USD pair, it highlights the nuanced approach central banks take in managing monetary policy and its implications for currency valuations.