Australian dollar slightly higher as CPI rises to 4%

The Australian dollar rose 0.40% after the Australian CPI release but has given much of those gains. AUD/USD is trading at 0.6663 in the European session, up 0.24% on the day.

Australian inflation surprises on the upside

Australia’s CPI accelerated to 4.0% in May, up from 3.6% in April and above the market estimate of 3.8%. This marked the highest level since November 2023. The price increases were felt throughout the economy, including electricity, automotive fuel, food and transport. Core CPI, which excludes volatile items such as energy and food, dipped lower to 4.0%, down from 4.1% in April.

This is the third straight month that headline inflation has risen and has raised concerns that the Reserve Bank of Australia will increase interest rates at its next meeting on August 6th. Policy makers discussed the possibility of a rate hike at the last two meetings but decided to keep rates on hold.
The fourth-quarter inflation report will be released a week before the meeting and will be a critical factor in the RBA’s rate decision.

The central bank has held rates at 4.35% for seven straight times but has warned that it could hike rates if inflation doesn’t resume its downtrend. The slight drop in core CPI is good news but may not be enough to stave off a rate hike in August.

The disappointing inflation release means that rate cuts are a long way off, perhaps until 2025. The RBA wants to see inflation fall back into the 2% to 3% target band and will be hesitant to lower rates until inflation is closer to the upper limit of 3%.

On Thursday, Australia releases Melbourne Institute Inflation Expectations, which is expected to rise to 4.3% in June, after a 4.1% gain in May.

AUD/USD Technical

AUD/USD is testing support at 0.6635. Below, there is support at 0.6591
0.6685 and 0.6729 are the next resistance lines

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