Australian CPI lower than expected, Australian Dollar drops

The Australian dollar has declined by 0.37% on Wednesday and is trading at 0.6320 in the European session. AUD/USD is down for a fourth consecutive trading day and has lost 1.2% during that time.

January inflation unchanged at 2.5%

Australia’s consumer price index was unchanged at 2.5% y/y for a second straight month in January.  This was below the market estimate of 2.6% but inflation stayed at its highest level since August 2024.  The drivers behind CPI were higher prices for food, electricity, alcohol and tobacco.  Core CPI, a more reliable inflation indicator than headline CPI, edged up to 2.8% year-on-year from 2.7% in January.

The monthly inflation indicator is not as comprehensive as the quarterly inflation report, but shows that inflation remains relatively soft.  The Reserve Bank of Australia won’t be too concerned as the inflation figures support last week’s decision to lower rates by 25 basis points, which brought the cash rate down to 4.1%.

RBA joins easing cycle but remains hawkish

Inflation is running within the Reserve Bank of Australia’s (Reserve Bank of Australia) target band of between two and three percent but the central bank remains concerned about upside risks to inflation.  The RBA finally pressed the rate-cut trigger last week after maintaining rates for over a year and joined most of the major central banks which are well into their easing cycles.

Still, the RBA decision can be considered as a “hawkish cut” as the central bank stated at the last meeting that it “remains cautious” about the possibility of further cuts. The easing cycle could end up being very short and the markets aren’t expecting another rate cut before May.

Central banks across the globe are concerned about US President Trump’s trade policy, specifically the threat of tariffs, which would dampen global growth and boost inflation. The Trump administration has already imposed tariffs and China has imposed counter-tariffs.  Another US-China trade war would damage the Australian economy as China is Australia’s largest trading partner.

AUD/USD technical

• AUD/USD  is testing support at 0.6320.  Below, there is support at 0.6284.

• 0.6365 and 0.6401 are the next resistance lines.