AUD/USD recovery stalls ahead of Q4 CPI
AUD/USD ended last week on a positive note at 0.6314, achieving a 2% gain and its highest weekly close in six weeks.
This rally was driven by a weaker United States (US) dollar following President Trump’s inauguration, which hinted at a softer stance on tariffs. It appeared to prioritise Mexico and Canada over China.
Tariff discussions and market impact
Plans for tariffs on Mexico and Canada, with potential 25% levies set for 1 February, were discussed. A 10% tariff on China was also mentioned for the same date. However, the perception of a softer stance on China supported the Australian dollar (AUD) into the weekend.
Unfortunately, this momentum did not carry over into the short holiday week as AUD/USD was pressured by weak Chinese purchasing managers’ index (PMI) data released on Monday. Additionally, risk aversion followed the emergence of DeepSeek, a new low-cost artificial intelligence (AI) model from China, which prompted concerns about the dominance of US AI and tech stock valuations.
While debates on tariffs and the impact of DeepSeek are ongoing, the immediate focus for AUD/USD is tomorrow’s release of Australia’s fourth-quarter (Q4) consumer price index (CPI). This will indicate whether the Reserve Bank of Australia (RBA) will opt to cut interest rates in February for the first time since November 2020 or maintain the current rate of 4.35%.
Q4 CPI figures
Date: Wednesday, 29 January at 11.30am AEDT
In the third quarter (Q3), headline inflation rose by 0.2%, bringing the annual rate to 2.8% year-on-year (YoY), the lowest since the March 2021 quarter. This decline was largely expected, driven by drops in electricity prices (-17.3%) due to government rebates and automotive fuel prices (-6.7%).
The RBA’s preferred inflation measure, the trimmed mean, increased by 0.8% in Q3 2024, reducing the annual rate to 3.5% from 4.0%, marking seven consecutive quarters of decline.
Encouraging signs were also seen in the latest monthly CPI indicator for November, released in early January. It showed a 2.3% YoY rise, with annual trimmed mean inflation easing to 3.2% from 3.5% in October.
For Q4 2024, expectations are for a 0.2% quarter-on-quarter (QoQ) rise in headline inflation, slowing the annual rate to 2.2%. The core measure, trimmed mean inflation, is expected to grow by 0.6% QoQ, easing the annual rate to 3.3%.
The Australian interest rate market is increasingly confident that inflation figures in line with these expectations will prompt the RBA to cut rates by 25 basis points (bp) to 4.10% in February, with this outcome being 65% priced in.
