AUD/USD Slides as AU Inflation Decelerates Further

AUD/USD Analysis

The Reserve Bank of Australia had refrained from raising rates at its last meeting in December and had softened its language around future moves, as it is making progress on inflation. Price pressures in Australia continued to abate according to today's data, as headline CPI eased to 4.1% in Q4, marking the slowest increase in a year. Monthly data and the quarterly trimmed mean measures, which exclude large rises and falls, also showed substantial deceleration. Earlier in the month, the employment report had shown the loss of 65,000 jobs in December, in what was the worst print in more than two years. The economy has slowed down, with GDP expanding by just 0.2% q/q in the third quarter.

The central bank has kept further tightening on the table, as inflation remains far from the 2-3% target, but today's CPI report raises the bar for such action. Markets believe that the terminal rate has already been reached and expect cuts later in the year. AUD/USD slides as a result and is in risk of new 2023 lows (0.6524), although further losses that would test 0.6364 would need strong catalyst.

On the other hand, the US Fed is more dovish, having already hinted at peak rates and signaled at least three cuts this year. As such, AUD/USD may find support and the chance to return above the EMA200 (0.6630). This would shift bias on the upside, but 0.6900 is distant.

The next leg of the move will be determined by Wednesday's Fed policy decision. Various officials have recently adopted a more cautious stance, pushing against the aggressive market pricing for cuts as early as March. If they intend to start lowering rates at that date, they would likely need to communicate that. If they don't, markets could be disappointed although their expectations have already been tempered. The Reserve Bank of Australia picks up the baton next week.