Australian dollar falls as inflation cools

• Australian CPI falls more than expected
• AUD/USD down after four-day winning streak

The Australian dollar is in negative territory on Wednesday, after four straight winning sessions. In the North American session, AUD/USD is trading at 0.6623, down 0.39%.

Australia’s inflation rate surprises on the downside

Australia’s inflation rate rose 4.9% y/y in October, down from September’s 5.6%, which was a five-month high. This beat the consensus estimate of 5.2% and marked the first decline in inflation since July. Trimmed mean inflation, a key core inflation gauge, ticked lower to 5.4%, down from 5.3% in September.

The drop in inflation is an encouraging sign for the Reserve Bank of Australia, which has tightened rates in order to curb inflation and bring it back down to the target range of 2%-3%. The RBA has said that inflation has peaked, but that doesn’t necessarily mean that interest rates have peaked as well. Future rate policy will largely depend on the data, and inflation will be a key factor. If inflation continues to fall at a relatively fast pace in the coming months, it’s likely that the tightening cycle is over. If that is not the case, then one final quarter-point hike remains a possibility, perhaps as early as February.

Today’s inflation print led to a repricing of the rate odds for the December meeting. The probability of a quarter-point hike has fallen from 10% on Tuesday to 2% today, according to the ASX RBA rate tracker. It’s a virtual lock that the RBA won’t raise rates next month and the inflation print has raised expectations of rate cuts in 2024.

Australia’s retail sales surprised on the downside with a 0.2% decline in October. This was another sign that elevated rates are filtering through the economy and dampening economic growth.

Fed members presented a mixed picture on Tuesday. Fed Governor Christopher Waller said that he was “increasingly confident” that rates had peaked and that the Fed could trim rates in the coming months if inflation continued on its downswing. Fed Governor Michelle Bowman expressed the opposite position, saying that further hikes will likely be needed in order to bring inflation back down to the 2% target.

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AUD/USD Technical

• AUD/USD tested support at 0.6618 earlier. Below, there is support at 0.6559
• 0.6650 and 0.6709 are the next resistance line

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