Australia’s CPI inflation declines to 3.5% YoY in July vs. 3.2% forecast

Australia’s Consumer Price Index (CPI) rose by 3.5% year-over-year (YoY) in July, compared to a 3.8% growth reported in June, the latest data published by the Australian Bureau of Statistics (ABS) showed on Wednesday.

The market forecast was a 3.2% print for the reported period.

The monthly Consumer Price Index climbed by 1.0% in July, compared to the previous reading of a 0.1% decrease, beating the estimated 0.8% increase.

Meanwhile, the Trimmed Mean CPI increased 0.5% MoM in July. Annually, the Trimmed Mean CPI advanced 3.6% YoY during the same period.

AUD/USD reaction to Australia's Consumer Price Index data

The Australian Dollar (AUD) sees fresh buying following Australia's CPI report. The AUD/USD pair is up 0.13% on the day to trade at 0.7172 at the press time.

Australian Dollar Price This week

The table below shows the percentage change of Australian Dollar (AUD) against listed major currencies this week. Australian Dollar was the strongest against the Canadian Dollar.

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Australian Dollar from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent AUD (base)/USD (quote).

This section below was published on August 25 at 22:30 GMT on Tuesday as a preview of Australia’s CPI inflation report.

• Australian Consumer Price Index seen easing in July.
• The Reserve Bank of Australia will focus on the Trimmed Mean CPI.
• The Australian Dollar aims to extend its latest rally vs the Greenback.

The Australian Bureau of Statistics (ABS) will publish the July Consumer Price Index (CPI) on Wednesday at 01:30 GMT. The report is expected to show that inflation rose 3.2% from a year earlier, easing from the 3.8% posted in June. The monthly CPI, however, is forecast at 0.8% following the -0.1% print from the previous month.

The ABS will also release the Trimmed Mean CPI, the Reserve Bank of Australia’s (RBA) favorite inflation gauge. The annual figure is expected to print at 3.5%, slightly lower than the previous 3.6%, while the monthly Trimmed Mean CPI is forecast to remain unchanged at 0.3%.

Ahead of the announcement, the Australian Dollar (AUD) trades a handful of pips below a multi-month high of 0.7180 against the US Dollar (USD), as the latter weakens amid geopolitical turmoil.

What to expect from Australia’s inflation rate data?

Inflation data is a critical factor in the RBA’s monetary policy decisions and is also related to geopolitical turmoil: the war in the Middle East is, no doubt, the primary source of mounting price pressures across the globe. And it is out of the RBA’s control.

“Members noted that higher energy prices and strong demand for goods used to develop AI services were adding to inflationary pressures in some economies. While core measures of consumer price inflation had not yet risen significantly following the onset of the Middle East conflict, members discussed the potential for these and other global developments to generate a more pronounced inflationary impulse. If so, this could push up Australian import prices and, in turn, consumer prices,” the minutes of the August monetary policy decision state.

Members also noted that inflation in Australia remained well above target, even after easing unexpectedly in year-ended terms in the June quarter, and expected trimmed mean inflation to remain above 3% until mid-2027.

The Board decided to leave the Official Cash Rate (OCR) unchanged at 4.35% after debating whether a fourth rate hike this year was necessary.

With that in mind, the upcoming inflation data would shape the market’s view on the upcoming monetary policy decision, and the Aussie will move in consequence. Annual Australian CPI peaked at 4.6% YoY in March. The anticipated reading of 3.2% should cool hopes of additional interest rate hikes in the near future, negatively affecting the Aussie.

A reading between the expected 3.2% and the previous 3.8% would be worrisome and raise the odds of additional hikes, while a reading above 3.8% would trigger panic. Market players will rush to bet on rate hikes and temporarily push the AUD higher, yet once the dust settles, the discouraging figure should play against the Australian currency.

Additionally, it is worth noting that, in the near term, Oil prices are retreating amid fresh hopes the US and Iran could resume negotiations. Market players are taking the headlines with a pinch of salt, but some relief is clear across financial boards.

How could the Consumer Price Index report affect AUD/USD?

As previously mentioned, inflation is expected to have eased further in July and approach the RBA’s range goal of 2% to 3%. Such a reading should have a limited, yet negative impact on the AUD. Ahead of the announcement, the AUD/USD pair hovers around 0.7150.

Valeria Bednarik, FXStreet Chief Analyst, notes: “From a technical point of view, the AUD/USD is bullish, although losing momentum. Still, technical readings in the daily chart suggest that buyers hold the grip despite the ongoing pause. The pair develops above all bullish moving averages, with the 20-day Simple Moving Average (SMA) about to cross above the 100-day SMA, both around 0.7070, providing a solid base and hinting at higher highs ahead. The same chart shows, however, technical indicators lack directional strength while holding well into positive territory.”

Bednarik adds: “The AUD/USD pair should take the 0.7080 peak to accelerate north, in which case, the next relevant level to watch is the 0.7130 price zone. Near-term support lies at 0.7135, ahead of the firmer one mentioned above around 0.7070. Should the latter give up, speculative interest could push the pair towards 0.7000 before buyers attempt to retake control.”

Australian Dollar FAQs

One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.

The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.

China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.

Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.

The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.

Economic Indicator

Consumer Price Index (YoY)

The Consumer Price Index (CPI), released by the Australian Bureau of Statistics on a monthly basis, measures the changes in the price of a comprehensive basket of goods and services acquired by household consumers. The indicator is the primary measure of headline inflation after a new methodology was applied to transition from quarterly to monthly readings, applying to data from April 2024 onwards. The YoY reading compares prices in the reference month to the same month a year earlier. A high reading is seen as bullish for the Australian Dollar (AUD), while a low reading is seen as bearish.

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