Australian Inflation Softens to 5.6% and Shuts the Door on the RBA

Highlights

• The AUD/USD was in action this morning, with inflation numbers for May in focus.
• Australia’s annual inflation rate softened from 6.8% to 5.6%, shutting the door on further RBA rate hikes.
• Ahead of the numbers, the Aussie was in the deep red as investors looked ahead to an expected softening in inflation and a hawkish Fed Chair Powell.

It was a busier start to the day on the Asian economic calendar. After a quiet first half of the week, Australian inflation numbers for May garnered plenty of interest.

The Australian annual inflation rate softened from 6.8% to 5.6% in May versus a forecasted 6.1%.

According to the ABS,

• Housing (+8.4%), food & non-alcoholic beverages (+7.9%), and furnishings, household equipment, & services group (+6.0%) saw the most significant price rises.
• However, food & non-alcoholic beverage price inflation softened in May from 8.1%.
• Clothing & footwear and automotive fuel prices were also a drag.
• Automotive fuel prices fell by 8.0%, in the 12 months to May, versus a 9.5% increase in April. Clothing & footwear prices fell by 0.4% versus a 2.0% increase in April.

From the last RBA meeting, the RBA minutes showed the RBA’s commitment to bringing inflation to target. However, the Aussie dollar lost ground as the markets interpreted the RBA’s consideration of a pause in June as the possible end to the monetary policy tightening cycle.

An annual inflation rate of sub-6.0% should shut the door on further RBA rate hikes near-term.

AUD/USD Reaction to the Australian CPI Report

Ahead of the CPI Report, the AUD/USD rose to an early high of $0.66875 before falling to a pre-stat low of $0.66595.

However, in response to the inflation numbers, the Aussie tumbled to a session low of $0.66181.

This morning, the AUD/USD was down 0.87% to $0.66275.

Next Up

Looking at the US session, there are no US economic indicators to move the dial. The lack of economic indicators will leave Fed Chair Powell to provide direction.

After two days of hawkish testimony, the Fed Chair must maintain the two-rate hike outlook to avoid surprising the markets. Better-than-expected consumer confidence and core durable goods orders from Tuesday support a hawkish policy outlook. However, the Fed Chair may tread carefully ahead of US Core PCE Price Index figures on Friday.

This morning, bets on a July Fed interest rate hike remained elevated despite manufacturing sector woes. According to the CME FedWatch Tool, the probability of a 25-basis point July Fed rate hike stood at 76.9% versus 74.4% on Monday.

Significantly, the chances of the Fed lifting rates to 5.75% in September stood at 15.4%, up from 10.4% on Monday, leaving monetary policy divergence in favor of the greenback.