Australian Dollar Gains Momentum as CPI Data Reinforces Rate Cut Outlook

The Australian dollar (AUD) edged higher in early April trading, buoyed by a softer-than-expected inflation report that bolstered expectations of a Reserve Bank of Australia (RBA) rate cut in May. While the headline Consumer Price Index (CPI) held steady at 2.4% year-on-year, the RBA’s preferred gauge—the Trimmed Mean CPI—dropped to 2.9%, marking its first entry into the central bank’s 2–3% target range in over three years. This milestone has reignited speculation that the RBA’s hiking cycle is nearing an end, with markets now pricing in multiple cuts by year-end.

CPI Data Signals Cooling Inflation

The March quarter CPI report revealed a 0.9% quarterly rise, aligning with forecasts but undershooting February’s elevated inflation. Key drivers of the increase included surging electricity prices (+16.3% in Brisbane due to expired rebates), higher education costs (+5.2% quarter-on-quarter), and seasonal food price spikes. However, underlying trends remain subdued, with services inflation easing to 3.7% annually—the lowest since mid-2022—and goods inflation rebounding modestly to 1.3%.

The RBA’s focus on the Trimmed Mean CPI—which excludes extreme price movements—is critical here. The gauge’s drop to 2.9% removes the need for further tightening, as the central bank prioritizes sustainable inflation control.

Rate Cut Expectations Firm Up

The RBA has maintained the Official Cash Rate (OCR) at 4.10% since February 2025 but now faces mounting pressure to ease. Markets are pricing in a 25 basis points (bps) cut at the May 19–20 meeting, with four to five reductions anticipated by year-end. This would push the OCR below 3.5%, offering significant relief to borrowers. For example, a 25 bps cut would reduce monthly repayments by ~$91 for a $600,000 mortgage, per Canstar estimates.

The currency’s recent rally to 0.6450 against the US dollar has stalled as traders balance inflation moderation with global risks. Analysts suggest near-term support at 0.6340, with downside risks to 0.6200 if geopolitical tensions escalate.

RBA’s Caution Amid Global Headwinds

While the CPI data strengthens the case for easing, the RBA remains vigilant. Risks include:
- US-China Trade Tensions: U.S. tariffs of 10% on Australian goods and 25% on steel/aluminum threaten export revenues. However, RBA Governor Michelle Bullock noted potential deflationary benefits if Chinese trade diversifies toward Australia.
- Labor Market Tightness: Wage growth has eased slightly but remains elevated due to constrained labor supply, risking second-round inflation effects.
- Global Growth Uncertainty: The RBA projects 2.2% GDP growth in 2025, but this hinges on resolving trade disputes and stabilizing supply chains.

Market Implications and Investment Outlook

The AUD’s near-term performance will depend on RBA communication and geopolitical developments. A May rate cut could stabilize the currency, but further declines in the OCR could weigh on the AUD as lower interest rates reduce its yield appeal.

Conclusion: AUD Faces a Delicate Balance

The April CPI report has solidified expectations of a May rate cut, with the Trimmed Mean CPI’s entry into the RBA’s target range being the pivotal factor. While the AUD’s recent gains reflect easing inflation, the currency remains vulnerable to global trade risks and domestic labor market pressures.

Key data points underscore this outlook:
- The Trimmed Mean CPI is now at 2.9%, within the RBA’s 2–3% band for the first time since 2021.
- Markets anticipate four rate cuts in 2025, potentially lowering the OCR to 3.0% or below by year-end.
- Australia’s GDP growth of 0.6% in late 2024 and projections of 2.2% in 2025 suggest resilience, but trade tensions could disrupt this trajectory.

Investors should monitor the May RBA meeting for clarity on the policy path, while hedging against external shocks. For now, the AUD’s cautious uptick reflects a market betting on the RBA’s commitment to inflation control—even as clouds loom on the horizon.