AUD/USD Holds Steady as Inflation Hits Highest Rate Since November

Inflation Rate Increases: Despite weaker-than-expected retail sales on Tuesday and a higher-than-anticipated inflation report today, the Australian dollar remained largely unchanged since Monday. Data revealed that Australia’s monthly inflation rate rose to 3.6% year-on-year in April, up from 3.5% in March. This defied market expectations for a slowdown to 3.4% and marked the highest rate since November.

Implications for the Reserve Bank of Australia: This is the second consecutive month that CPI has accelerated and surpassed estimates, which might prompt the RBA to further delay rate cuts. Although the RBA has significantly reduced inflation, achieving the target range of 2-3% remains challenging. The central bank forecasts that inflation will not fall within the target range until late 2025.

RBA’s Rate Hikes: Since May 2022, the RBA has raised interest rates by 425 basis points to a 12-year high of 4.35%. It has paused rate hikes for four consecutive meetings since November, as cautious consumers reduced spending and the economy slowed. The RBA has kept markets on edge by not ruling in or out any policy changes.

Market Expectations for RBA Policy: Markets currently anticipate that the RBA will keep rates elevated for a longer period. The latest RBA meeting minutes indicated that the board considered raising rates in May but ultimately decided to maintain the current policy. They acknowledged the difficulty in predicting future changes in the cash rate, noting that recent data increased the risk of inflation remaining above target for an extended period.

Market Focus on US Inflation Reports: The main event for the week will be the U.S. core personal consumption expenditures (PCE) price index report on Friday, which is the Federal Reserve’s preferred measure of inflation. Expectations are for it to remain steady on a monthly basis. Any surprises in the data are likely to bring a new wave of volatility to the AUD/USD pair.

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