• The Australian monthly consumer price index is forecast to be 3.8% year-on-year in June.
• Quarterly CPI inflation is expected to rise by 1% year-on-year in the second quarter.
• The Reserve Bank of Australia will meet on 6 August to discuss monetary policy.
• The Australian dollar remains frail, trading at a two-month low against the US dollar.

Australia will release novel inflation data on Wednesday, ahead of monetary policy announcements from the Bank of Japan (BoJ) and the US Federal Reserve (Fed). The Australian Bureau of Statistics (ABS) will release two different inflation measures on Wednesday. Ahead of the announcement, the Australian dollar (AUD) is trading near a two-month low against the US dollar, with the AUD/USD rate trading just above 0.6500.

On the one hand, the ABS will release the quarterly Consumer Price Index (CPI) for the second quarter of 2024, and on the other, the monthly CPI for June, an annual figure comparing price pressures over the previous twelve months. It is worth remembering that the quarterly report includes the Trimmed Mean Consumer Price Index, the Reserve Bank of Australia’s (RBA) favourite inflation indicator.

When the RBA met in mid-June, it kept the cash rate steady at 4.35%. Policymakers noted that they had discussed raising rates but ultimately decided to keep them on hold. The board stopped tiny of ruling out a potential rate hike, and policymakers said they would remain vigilant on inflation amid an unexpected boost in price pressures in May.

What to expect from Australian inflation data?

The ABS is expected to report that monthly CPI rose 3.8% in the year to June, down from 4% in May. Quarterly CPI is forecast to rise 1% q/q and 3.8% y/y in the second quarter of the year. Finally, the RBA Trimmed Mean CPI, the central bank’s preferred indicator, is expected to rise 4% y/y in the second quarter, matching the previous quarter’s reading.

An unexpected rise in inflation rates in the first quarter of 2024 has not only put the RBA’s interest rate cut on hold, but has also revived speculation about a potential hike. Inflation has not only remained above the central bank’s target, but has also unexpectedly risen in the first quarter of the year.

However, signs of snail-paced growth have also become apparent, and the RBA is fully aware of this. “Growth in household consumption has been particularly weak,” according to the RBA’s May monetary policy statement. The document further shows that “recent information suggests that inflation continues to moderate, but is declining more slowly than expected.” Finally, policymakers said that “returning inflation to target within a reasonable time frame remains the Governing Board’s highest priority.”

In such a scenario, even with an unexpected boost in pricing pressure, the case for a Cash Rate hike should be moderate. Nevertheless, speculative interest may decide to price it in, causing the Australian dollar to rise sharply against most of its major rivals.

On the other hand, weaker-than-expected CPI data should boost the chances of an interest rate cut before the end of the year and put robust selling pressure on the AUD.

How could the Consumer Price Index report impact the AUD/USD pair?

The RBA will meet on Tuesday, 6 August and announce a novel monetary policy decision. This increases the importance of CPI data, which will form the heart of the board’s decision.

At this point, it is worth remembering that many central banks have already cut interest rates or will do so soon. If the RBA waits too long to cut rates or even decides to raise them, the AUD could strengthen beyond reason to support local growth.

Ahead of the CPI reports, the AUD/USD pair had lost about 300 pips from a peak of 0.6797 in delayed June to a trough of 0.6512 reached on July 25.

Valeria Bednarik, FXStreet’s Principal Analyst, says: “The AUD/USD pair is showing modest signs of bearish exhaustion after flirting with 0.6500, but there are no technical signs of a change in direction. The daily chart shows the pair developing below all of its moving averages, with the 20-simple moving average (SMA) heading firmly south above the longer ones. The immediate SMA is 200, providing dynamic resistance at around 0.6585. Meanwhile, technical indicators lack directional strength, consolidating at oversold levels.”

Bednarik added: “AUD/USD needs to extend gains beyond 0.6600 and stay above that level to start a bullish correction. Whether it can continue higher will depend on breaking through 0.6690, the 61.8% retracement of the 0.6797/0.6512 decline. A break of the range bottom exposes the 0.6470 price zone, while below the latter the pair could decline towards the 0.6400/30 area.