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The RBA’s Inflation focus could move the AUD

In the last Reserve Bank of Australia meeting (RBA) the RBA paused interest rates. However, they still signalled more interest rate hikes could be to come. What was the main concern that meant the RBA signalled there could be more hikes to come? In a word, it was inflation.

Australia’s inflation taking longer to tackle.

Australia’s headline inflation print has pulled back from a 30-year high, but it is sell way above the RBA’s 2% target at 7%.

The core reading (Trimmed mean) is also similarly resilient with a print of 6.6% in March this year.

So, the RBA are in a tricky point of their monetary policy cycle. On one hand that want to stop hiking rates, but on the other hand, stubborn inflation has given them pause for thought. In the last meeting the RBA stated that ‘the balance of risks on inflation (had shifted) to the upside compared with a month earlier’. However, they also think that inflation has ‘passed its peak’ and is forecast to return to the target range by mid-2025.

What to watch for the AUD

The headline is expected to fall to 6.2% from 7%. The core (trimmed mean) is expected to fall to 6% from 6.6%. Expectations are as follows, courtesy of Financial Source’s economic data tracker:

(Click on image to enlarge)

So, looking at the above we can see that a headline that prints below 5.8% and a trimmed mean below 5.9% will surprise markets. This would be the most probable trading opportunity as a downside print would give the RBA confidence to remain on hold for rates. That should result in AUD downside with AUDNZD losing value out of the meeting. This is one key data point to watch as the RBA are watching the data closely.

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