AUD’s Trajectory Hinges on Inflation and RBA Policy

Market Overview

Australian dollar (AUD) is in focus as traders await the release of Australia’s Consumer Price Index (CPI) data. The previous report showed inflation easing from 2.8% to 2.5% year-on-year, and expectations are set for another decline. Government measures like energy rebates and transportation subsidies have helped reduce inflationary pressures, while housing costs are also contributing to the disinflation trend. The Reserve Bank of Australia (RBA) has expressed cautious optimism, stating that inflation is moving in the right direction. This has increased market confidence that the RBA could consider rate cuts as early as February 2025. The AUD’s performance will largely depend on how the upcoming CPI data aligns with these expectations.  

Fundamental Overview

The fundamental backdrop for the AUD hinges on the inflation trajectory and the RBA’s policy response. A further decline in CPI could reinforce the case for rate cuts, potentially weakening the AUD. The RBA has signaled growing confidence in inflation returning to target, but any dovish shift in tone could weigh on the currency.

Bullish Scenario: If inflation surprises to the upside or core inflation remains sticky, the AUD could strengthen, particularly against currencies from dovish central banks (e.g., EUR, CHF).  

Bearish Scenario: If inflation meets or falls below expectations, the AUD could face downward pressure, especially against stronger currencies like the USD or GBP.  

Technical Overview

The AUD/USD pair has recently displayed strong bullish momentum, with its rally beginning on January 13, 2025, following the formation of a bullish order block on the H4 timeframe. This move broke out of a consolidation range formed within a Daily Inside Bar pattern, propelling the pair to the highs of 0.6332, in a 52 pip range, which align with the 100% Fibonacci extension of the Inside Bar’s range. However, current price action is encountering significant resistance around the 0.6332 level and may present signs of exhaustion, particularly if upcoming CPI data prints lower than expected. A bearish scenario could unfold with confirmation of a bearish order block near the 0.62789 level, which aligns with the 200-day Moving Average (MA) and serves as a key level area from January 6, 2025, when a Daily Inside Bar catalyzed a bearish leg.

Conclusion  

Australia’s upcoming CPI data is set to be a major catalyst for the AUD. A lower-than-expected inflation reading could reinforce expectations of rate cuts, potentially weakening the currency. On the other hand, a higher inflation figure could bolster the AUD, especially if it signals persistent price pressures.

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