Australian Dollar Shows Its Mettle in Wake of Inflation Undershoot
- Written by: Gary Howes
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It's a clear show of intent from the Aussie on Wednesday.
The currency strengthens on the day domestic inflation data undershoots expectations, a defiant price action that underscores the view made by many analysts that it will be an outperformer this year.
Australian CPI inflation printed 3.4% y/y in November, below expectations for 3.7% and down on October's 3.8%.
On paper, this would suggest inflation is heading in the right direction, which would allow the Reserve Bank of Australia (RBA) to consider another interest rate cut this year, or at least delay any plans to raise rates.
That's an AUD-negative setup.
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However, the market's takeaway is inflation is simply too far above the RBA's 2.0-3.0% target range to consider a cut anytime soon, and money markets show investors are betting on a rate rise by May.
"While inflation looks to have run uncomfortably high in the second half of 2025, we expect the RBA to hold the cash rate at 3.60% at its Monetary Policy Board meeting next month. It will, however, be a close decision, and we'd expect a rate hike to be explicitly discussed.
A number of analysts we follow point out that any rate hikes at the RBA would bolster Aussie interest rate-linked assets, making them relatively attractive to international investors, which plays supportive of AUD.
"All in all, it feels like a good time to own some Australian dollars," says Kit Juckes, FX strategist at Société Générale.
Combine this interest rate story with rising global stocks and commodities and we have a firm basis for AUD appreciation.
"We forecast AUD strength into 2026. A supportive risk backdrop would benefit the currency," says HSBC in its year-ahead currency note.
Following the release, the pound to Australian dollar exchange rate dipped to below the key 2.0 support zone (see above).
We think that a break below here introduces the prospect of a more meaningful decline sub-2.0.
As our Week Ahead Forecast noted, there's been a constrictive feel to price action, resulting in that wedge we see above.
We believe that's a precursor to the next big move. Right now, the tea leaves hint at the break being lower.
