Overview
The Australian dollar (AUD) strengthened following the release of the latest Consumer Price Index (CPI) figures, which indicated that inflation remains elevated and aligns with market expectations. The headline CPI held steady at 3.8% year-on-year, while the trimmed mean inflation, the Reserve Bank of Australia's (RBA) preferred measure, remained at 3.4% year-on-year for the second consecutive month. This marks the fourth month in a row that inflation has exceeded the RBA's target range of 2-3%.
Inflation Details
Despite the monthly trimmed mean inflation rising by only 0.2% month-on-month, which was below the expected 0.4%, the overall annual core inflation remains firmly above the target. Key contributors to the persistent inflation include rising housing costs, sticky services inflation, and ongoing energy-related price pressures.
RBA's Tightening Bias
RBA Governor Michele Bullock has emphasized that inflation above 3% is "unacceptable," reinforcing the central bank's commitment to returning inflation to target levels. The current inflation figures bolster the RBA's tightening bias, suggesting that monetary policy will remain restrictive. If upcoming data does not show a significant moderation in inflation, the likelihood of further tightening later in the year increases.
The RBA has already initiated a tightening path with a 25 basis point hike earlier this month, and the focus now shifts to the timing of future hikes, particularly if inflation continues to rise and employment data remains strong.
Market Reaction
Following the CPI release, the Australian dollar appreciated against major currencies, with AUD/USD rising approximately 0.25% in the first hour. The AUD also gained around 0.2% against the euro, Swiss franc, British pound, and Canadian dollar. This reaction indicates that the market had largely anticipated the CPI results, with expectations of further tightening already factored into prices.
Technical Analysis
From a technical perspective, the AUD/USD remains in a bullish consolidation pattern near three-year highs. The daily chart shows a bullish outside day that respected the 20-day simple moving average and the 70 cent level as support. Momentum indicators suggest potential for a bullish breakout, with the bias leaning towards a move towards the 2023 high of 0.7175. However, geopolitical tensions, particularly surrounding Iran, could impact the currency's performance.