Mixed inflation data sends conflicting signals
AUD/USD has fallen to an 11-week low of 0.6899 following this morning’s Australian consumer price index (CPI) release, its lowest level since early April. The ‘Aussie Battler’, as it is fondly known, has now dropped more than 5% from the 0.7277 high struck in early May.
Today’s Australian inflation update for May delivered a mixed bag. Headline CPI came in softer than expected at 4.0% year-on-year (YoY), easing from 4.2% in April and well below the 4.4% consensus. A decent chunk of the relief came from transport, where automotive fuel prices fell sharply again.
However, the Reserve Bank of Australia’s (RBA) preferred trimmed mean measure rose to 3.6% from 3.4% the prior month, a touch above the 3.5% market forecast. That keeps underlying inflation on an upward path for now and underscores just how uneven the disinflation process is likely to be in the months ahead.
In its May Statement on Monetary Policy, the RBA had pencilled in a headline inflation peak at 4.8% around mid-year. Today’s softer headline print makes that peak look increasingly unlikely to materialise. At the same time, the trimmed mean is edging closer to the 3.8% level the Bank forecast for June, keeping core pressures firmly in focus.
Labour data now key to policy outlook
Tomorrow’s May labour force report will provide the next important test. April’s numbers were already soft, with employment falling 18,600 against expectations of a 15,000 gain and the unemployment rate climbing to 4.5%, its highest since late 2021. Consensus for May looks for employment to rise around 25,000 and the jobless rate to ease back to 4.4%.
A rise in the unemployment rate to 4.6% or higher would add weight to the view that the RBA has done enough. While a stronger jobs print of 4.4% or lower would keep tightening risks firmly on the table, with a firm eye to the quarter two (Q2) inflation report scheduled for release on 29 July.
In short, while domestic events and the Aussie’s disappearing yield advantage are clearly playing a role in AUD/USD decline, so too is the resurgent US dollar, which looks like a volcano primed to erupt. The next few domestic data prints, starting with tomorrow’s jobs report, will be crucial in deciding whether the Aussie can find any near-term footing or whether AUD/USD extends its decline.
