Australia will release the Consumer Price Index (CPI) report on Wednesday, and it is expected to show inflation rose 3.6% year over year in December, slightly above the previous reading of 3.4%. The monthly CPI is foreseen at 0.7% after posting 0% in November.
The Australian Bureau of Statistics (ABS) will also release the Trimmed Mean CPI, the Reserve Bank of Australia’s (RBA) favorite inflation gauge. The annual figure is expected to print at 3.2%, matching the previous reading, while on a monthly basis, the Trimmed Mean CPI is forecast at 0.2%, down from the 0.3% posted in the previous month.
Data will be released one week ahead of the RBA monetary policy meeting, scheduled for February 2-3. The central bank last met in December, when policymakers decided to leave the Official Cash Rate (OCR) on hold at 3.6%. The monetary policy statement showed that the Board noted inflation has picked up more recently, and that data “suggest some signs of a more broadly based pick-up in inflation, part of which may be persistent and will bear close monitoring.”
Ahead of the CPI release, the Australian Dollar (AUD) trades above 0.6900 against the US Dollar (USD), its highest since September 2024
What to expect from Australia’s inflation rate numbers?
ABS data is expected to confirm what market analysts suspect: that the RBA’s next monetary policy move will be a rate hike.
As previously noted, the ABS is forecast to report that the annual CPI rose by 3.6% in the year to December, higher than the 3.4% posted in November and above the RBA’s goal of keeping inflation between 2% and 3%.
Resurgent inflationary pressures, coupled with a pretty solid labor market, boosted the odds of an interest rate hike in Australia coming up next. The ABS recently reported that the country added 62,500 new jobs in December, and that the Unemployment Rate dropped to 4.1%, its lowest in seven months. Even further, underemployment fell to a multi-decade low.
Before the release of inflation data, the odds of an RBA rate hike at the February meeting stand at roughly 63%, according to Reuters.
Meanwhile, the AUD/USD pair trades at its highest since September 2024 amid broad US Dollar (USD) weakness. Market players continue to drop the Greenback amid skyrocketing levels of uncertainty, most stemming from United States (US) President Donald Trump’s decision.
President Trump resumed his trade war against the world after indicating that, since Norway did not award him the Nobel Prize, he would now focus on protecting his country rather than global peace. He kept escalating tensions with Europe amid his desire to possess Greenland, a Danish territory close to the US land, claiming it’s critical to US defense. Mid-January, however, he de-escalated tensions by announcing the framework of a deal, but without any details on the matter, market participants remain wary. Trump also threatened higher tariffs on South Korea on Tuesday, as the Asian country’s legislature still had not approved the trade deal achieved last year.
The US President claimed he will soon announce the next Chair of the Federal Reserve (Fed), as Jerome Powell’s mandate finalizes in May. Market participants clearly anticipate a hawk, regardless of the name, and keep betting on rate cuts throughout 2026, something still quite unclear.
How could the Consumer Price Index report affect AUD/USD?
In this scenario, the anticipated inflation data should confirm the RBA’s hawkish stance as previously noted, and hence, result in a firmer AUD. Higher-than-anticipated readings will have the same effect, further boosting demand for the Aussie.
If the data comes in softer than expected but still above 3%, the scenario should remain the same, though the AUD’s advance will be more restrained. However, in the unlikely event that annual inflation falls below 3%, market players will rush to bet against an RBA interest rate hike and could see AUD/USD fall as an immediate reaction to the news. Sustained losses, however, seem unlikely given the USD situation.
Valeria Bednarik, FXStreet Chief Analyst, notes: “From a technical point of view, the AUD/USD pair has room to extend its advance, despite overbought conditions clear in the daily chart. The pair is currently trading near a multi-month peak in the 0.6950 price zone, and shows no signs of slowing its advance. The rally could continue initially towards the 0.7000 threshold, while once above the latter, there’s little in the way towards 0.7100.”
Bednarik adds: “In the case of a retracement, the pair will find near-term support in the 0.6890 region, when the pair will finally close the weekly opening gap. A slide below the latter exposes the next static support at 0.6830.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
Economic Indicator
Consumer Price Index (YoY)
The Consumer Price Index (CPI), released by the Australian Bureau of Statistics on a monthly basis, measures the changes in the price of a comprehensive basket of goods and services acquired by household consumers. The indicator is the primary measure of headline inflation after a new methodology was applied to transition from quarterly to monthly readings, applying to data from April 2024 onwards. The YoY reading compares prices in the reference month to the same month a year earlier. A high reading is seen as bullish for the Australian Dollar (AUD), while a low reading is seen as bearish.
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