Previewing Australia's Q1 2023 CPI and its potential impact on AUD/USD

The release of a softer-than-expected monthly CPI indicator for February set the scene for the RBA to pause its rate hiking cycle at its April Board meeting.

In his monetary policy statement in March, Governor Philip Lowe stated, “The monthly CPI indicator suggests that inflation has peaked in Australia.”

The Monthly CPI indicator for February rose by 6.8%, below forecasts for a 7.1% rise and well below the 8.4% peak of December 2022. The release on Wednesday of the March quarter CPI is expected to confirm that while inflation peaked late last year, inflation remains elevated and well above the RBA’s target band of 2-3%.

The key numbers:

• Headline CPI is expected to increase by 1.3% in Q1 2023 for an annual rate of 6.9%, falling from 7.8% in Q4 2022
• Trimmed mean is expected to rise by 1.4% in Q1 2023 for an annual rate of 6.7%, falling from 6.9% in Q4 2022. This is in line with the RBA’s own forecasts.

Australian trimmed mean inflation rate chart

What does it mean for the RBA meeting next week?

The release of the RBA Board meeting minutes for the April meeting confirmed that the RBA’s decision to pause its rate hiking cycle was a close call and that it retains a tightening bias. This means the RBA’s meeting in May is live.

The Board noted, “on balance, [we] agreed that there was a stronger case to pause at this meeting and reassess the need for further tightening at future meetings.”

Presuming that core inflation (trimmed mean) prints at or below the expectations outlined above, it will likely keep the RBA on the sidelines for another month to continue to assess the impact of its 350bp or rate rises since last May.

However, following the release of stronger-than-expected labour market data in mid-April, if the Q1 2023 core inflation is higher than expected, it will likely see the RBA act on its tightening bias and hike the cash rate again as soon as next month.

As of Friday’s close, the rates market is about 25% price for a 25bp rate hike to 3.85% at the RBA’s Board Meeting in May. At the margin, an RBA rate rise next week would be a positive for the AUD/USD via increased yield support.

ASX 30-day interbank cash rate futures implied yield curve chart

AUD/USD technical analysis

The AUD/USD closed lower last week at .6693 (-0.25%) due to a rise in US – China geopolitical tensions and a slump in the iron ore price thus weighing on the local unit into the weekend.

While the pair remains below range highs at .6800/10, the risks are for a break of support .6600/.6550 area towards .65c.

A sustained break of trendline support at .6550 coming from the March .6565 low would be the first indication that the move lower has regained traction.

AUD/USD daily chart

1. TradingView: the figures stated are as of April 24, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.