Will accelerating CPI inflation in Australia lead the RBA to move rates up again?

The Australian Bureau of Statistics (ABS) will publish the high-impact Consumer Price Index (CPI) for May on Wednesday at 01:30 GMT.

Heading into the inflation test, the Australian Dollar (AUD) is at its lowest level in two months against the US Dollar (USD), having surrendered the 0.7000 psychological mark.

What to expect from Australia’s inflation rate data?

Australia’s annual CPI is expected to rise by 4.4% in May after increasing by 4.2% in April, inching close to the near three-year high of 4.6% seen in March. The monthly CPI is seen declining by 0.3% in the same period, following a 0.4% growth reported previously.

The Trimmed Mean CPI inflation is likely to pick up slightly to 3.5% year-over-year (YoY) in May from 3.4%, while the month-over-month (MoM) figure is set to hold steady at 0.3%.

The inflation data release comes after the Reserve Bank of Australia (RBA) held the Official Cash Rate (OCR) at 4.35% last week, pausing after three consecutive rate hikes since the beginning of the year.

The RBA stated that the “board remains focused on ensuring that inflation does not become embedded once the impulse from higher oil prices has passed through.”

“The board will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions,” the central bank further noted.

Since the RBA monetary policy meeting, geopolitical tensions have eased somewhat. The United States (US) and Iran struck a peace deal, sending Oil prices sharply lower. That could help alleviate the pressure on Australian inflation in the months ahead.

The divergence between the monthly and annual figures could be justified by a roughly 12% fall in fuel prices over the month amid easing global oil prices and a domestic fuel excise cut, which is set to expire this month.

Meanwhile, new dwelling costs and rents are expected to provide upward pressure on housing inflation.

However, the Trimmed Mean measures will be closely scrutinized to assess whether second-round pass-through from the Middle East energy shock is broadening into the wider services and housing basket.

The RBA closely watches this underlying inflation trend for policy signals.

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

AUD/USD is languishing below 0.7000 in the run-up to the inflation showdown, with buyers awaiting a surprise uptick in the annual and monthly Trimmed Mean CPI inflation data to rescue the Australian Dollar.

A softer headline driven by sharply lower fuel prices, but stubbornly high underlying inflation, will keep the RBA on high alert and hopes for rate hikes alive.

On the other hand, easing inflationary pressures in Australia would push back against expectations of the RBA resuming rate hikes late this year, further weighing on the AUD.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, highlights key technical levels for trading AUD/USD on the CPI release.

“The pair is maintaining a bearish near-term bias as it holds beneath the 21-day, the 50-day and the 100-day Simple Moving Averages (SMAs), clustered between 0.7070 and 0.7135. The pair sits only above the 200-day SMA at 0.6855, which acts as the last meaningful layer of trend support, while the Relative Strength Index (RSI) at 32 is approaching oversold territory, hinting that downside momentum is stretched but not yet exhausted.

On the topside, initial resistance is aligned with the 21-day SMA at 0.7077, followed closely by the 100-day SMA at 0.7085, with the 50-day SMA higher up at 0.7136 reinforcing a broader cap on recovery attempts. On the downside, the 200-day SMA at 0.6855 is the key support to watch; a decisive break below this longer-term measure would likely open the door to a deeper bearish extension in the coming sessions”.

(The technical analysis of this story was written with the help of an AI tool.)