Australian CPI Report Delivers the RBA Breathing Room

It was a busy morning for the Asian markets. The Australian CPI Report for Q1 drew interest this morning.

The Australian annual inflation rate softened from 7.8% to 7.0% in Q1 versus a forecasted 6.9%. Quarter-on-quarter, consumer prices increased by 1.4% versus a forecasted 1.3%. In Q4, consumer prices rose by 1.9%.

According to the ABS,

• The Annual inflation rate for goods softened from 9.5% to 7.6%, with lower auto fuel prices and the discounting on furniture, appliances, and clothes contributing to the decline.
• However, the inflation rate for services registered its most marked annual increase since 2001, driven by price increases for holiday travel, medical services, rents, and restaurants.
• Annual food inflation eased from 9.2% to 8.0% but remained elevated.

The latest CPI Report supports the RBA decision to stand pat in April.  Significantly, the RBA may continue to hit the pause button. However, RBA Governor Philip Lowe warned that hitting the pause button did not mean an end to the monetary policy tightening cycle.

While today’s CPI Report could support a further hold, inflation remains elevated. Elevated inflation leaves the door open to further interest rate hikes.

AUD/USD Reaction to the Australian CPI Report

Before the CPI Report, the AUD/USD fell to an early low of $0.66229 before rising to a pre-stat high of $0.66391.

The AUD/USD responded to the CPI Report, rising to a post-stat high of $0.66342 before falling to a low of $0.66111.

This morning, the Aussie was flat at $0.66252.

Next Up

Later today, US core durable goods and trade data will draw interest. A larger-than-expected fall in core durable goods orders would further fuel recession fears. There is no Fed talk for investors to consider. The Fed entered the blackout period on Saturday.

Away from the economic calendar, banking sector-related news and US corporate earnings will also move the dial. Big names on the US earnings calendar include Meta Platforms (META).

Overnight, US economic indicators and UPS (UPS) earnings results fueled fears of a US economic recession, leaving riskier assets in the deep red. News of sliding deposits at First Republic Bank (FRC) added to the bearish mood, leading to a sharp decline in bets on Fed interest rate hikes in May and June.

According to the CME FedWatchTool, the probability of a 25-basis point May interest rate hike fell from 90.5% to 76.1% on Tuesday. Significantly, the chances of a June hike declined from 24.7% to 9.2%.