Australian Dollar Bounces into Key Inflation Report
- Written by: Gary Howes
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A rebound in market sentiment has played into the hands of the Australian Dollar, which is amongst the best performers in G10 ahead of the midweek release of local inflation figures.
The Pound to Australian Dollar exchange rate has fallen for two days in a row and is at 1.9137 after equity markets continued to recover from the previous week's politically inspired weakness.
The Aussie is up half a per cent against the U.S. Dollar this week at 0.6446 and is up by a similar margin against the Euro (EUR/AUD at 1.6512).
"The bounce in risk due to Iran’s muted response to Israel’s attack last Friday has been good news for the AUD. Indeed, the bounce in risk has led to the Antipodean currencies outperforming so far this week," says David Forrester, Senior FX Strategist at Crédit Agricole.
"Firm commodity prices also continue to support the AUD," he adds.
According to Crédit Agricole's FAST FX model, AUD/USD is bouncing from undervalued territory and the model is long the exchange rate this week.
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But, Australia’s CPI data release on Wednesday will be the key domestic event driving AUD's performance this week, according to analysts.
"As with NZ’s inflation data released last week, falling goods prices inflation, especially food, will keep inflation on a downward path, but sticky services inflation will limit the deceleration," says Forrester.
Analysts anticipate rising education and housing costs, as well as higher insurance premiums, to make the task of getting inflation down the last 1% to within the RBA’s 2-3% target band tough.
Headline inflation is expected by the market consensus to fall further and from 4.1% YoY to 3.5% YoY in Q1. The RBA’s preferred measure of core inflation, trimmed mean inflation, is expected to decline by less and from 4.2% YoY to 3.8% YoY.
"We expect the Australian inflation data to firm up expectations that the RBA will not be cutting rates until late in 2024, if at all this year," says Forrester.
Such expectations would bolster the Aussie Dollar against the currencies belonging to central banks that are set to cut on multiple occasions this year. The Pound is one of them.
