RBA's Positive CPI Reading and the Outlook for Rate Cuts in August

The Reserve Bank of Australia (RBA) has been navigating a delicate balancing act in 2025, juggling the need to curb inflation while supporting a slowing economy. The latest Consumer Price Index (CPI) data for the June quarter has provided a critical turning point, reinforcing expectations of a rate cut in August. This article examines how the inflation slowdown is shaping the AUD/USD exchange rate, the ASX 200 equity market, and offers actionable insights for investors preparing for the RBA's upcoming decision.

Inflation Eases, RBA Readies for Rate Cuts

The June CPI report revealed a trimmed mean inflation rate of 2.6%, down from 2.9% in March—a significant step toward the RBA's 2–3% target range. This decline is broad-based, with services and goods inflation both cooling. For instance, annual services inflation fell to 3.3% due to lower rent and insurance costs, while goods inflation dropped to 1.1%, driven by cheaper fuel and housing construction.

RBA Governor Michele Bullock has emphasized the need to confirm this trend before acting, but the data now provides the necessary clarity. Economists like Luci Ellis of Westpac predict a 25-basis-point cut in August, with further easing in November and February. This trajectory aligns with a broader global trend of monetary easing, as central banks prioritize growth over inflation in an increasingly uncertain economic climate.

AUD/USD: A Bearish Outlook Amid RBA Easing

The Australian dollar has been under pressure for months, and the RBA's rate-cut cycle is likely to exacerbate this trend. While the June CPI data briefly bolstered the AUD/USD pair, the market quickly reverted to its bearish stance, with the pair trading near 0.6500. Analysts expect further depreciation to 0.64 as the RBA's easing continues.

The muted reaction to the CPI data underscores the dominance of U.S. Dollar strength. The U.S. Federal Reserve's wait-and-see approach to rate cuts, coupled with global risk-on sentiment, has kept the USD elevated. For investors, this means hedging currency exposure will be critical. A 25-basis-point cut in August could trigger a sharp sell-off in the AUD, particularly if the Fed signals no near-term easing of its own.

ASX 200: A Bullish Momentum Amid Rate Cuts

In contrast to the AUD/USD's struggles, the ASX 200 has rallied to record highs, testing the 8763 benchmark. The index is expected to continue upward as rate cuts reduce borrowing costs and boost consumer spending. Historical data from 2010–2025 shows that the ASX 200 typically gains 2.6% six months after the first rate cut in a cycle, rising to 5.3% after 12 months.

Sectors such as real estate, utilities, and consumer discretionary have historically outperformed during easing cycles. For example, the May 2025 rate cut saw real estate and technology stocks surge by 1.41% and 2.3%, respectively. Investors should consider overweighting these sectors ahead of the August decision, while remaining cautious about export-driven industries like mining, which may face headwinds from a weaker AUD.

Timing Entry Points: A Strategic Approach

For investors seeking to capitalize on the RBA's easing, timing is crucial. Historical correlations suggest that the ASX 200 tends to outperform in the months following a rate cut, with the most significant gains occurring after the first 25-basis-point reduction. The August 12–13 meeting is a pivotal event: a confirmed cut could trigger a short-term rally, particularly in rate-sensitive sectors.

However, caution is warranted. Global risks—such as U.S.-China trade tensions and China's economic slowdown—could introduce volatility. Investors should consider dollar-cost averaging into equity positions and hedging currency exposure through AUD derivatives. For the ASX 200, breaking above 8763 could signal a path toward 9000, but technical indicators like the RSI and MACD should be monitored for overbought conditions. Historically, however, strategies based on RSI overbought signals have shown mixed results. A 2022–2025 backtest of buying ASX 200 stocks with RSI overbought and holding for 30 days yielded a 4.17% CAGR but underperformed the benchmark by -43.75% with a Sharpe ratio of 0.18, underscoring the risks of acting on overbought conditions alone.

Conclusion: A Cautious Bull Case

The RBA's August rate cut is now a near-certainty, with inflation firmly within the target range. While this will weaken the AUD and create currency-related risks, it also presents a compelling opportunity for equity investors. The ASX 200 is poised to benefit from lower borrowing costs and improved consumer demand, particularly in sectors like real estate and utilities.

Investors should adopt a balanced approach: overweight rate-sensitive sectors, hedge currency exposure, and monitor global macroeconomic risks. The RBA's August decision marks the start of a broader easing cycle, and those who act decisively now may find themselves well-positioned for the next phase of Australia's economic recovery.