AUD/USD recovery falters ahead of Q4 CPI release

AUD/USD recovery stalls ahead of Q4 CPI

AUD/USD ended last week on a positive note at 0.6314, achieving a 2% gain and its highest weekly close in six weeks.

This rally was driven by a weaker United States (US) dollar following President Trump's inauguration, which hinted at a softer stance on tariffs. It appeared to prioritise Mexico and Canada over China.

Tariff discussions and market impact

Plans for tariffs on Mexico and Canada, with potential 25% levies set for 1 February, were discussed. A 10% tariff on China was also mentioned for the same date. However, the perception of a softer stance on China supported the Australian dollar (AUD) into the weekend.

Unfortunately, this momentum did not carry over into the short holiday week as AUD/USD was pressured by weak Chinese purchasing managers' index (PMI) data released on Monday. Additionally, risk aversion followed the emergence of DeepSeek, a new low-cost artificial intelligence (AI) model from China, which prompted concerns about the dominance of US AI and tech stock valuations.

While debates on tariffs and the impact of DeepSeek are ongoing, the immediate focus for AUD/USD is tomorrow's release of Australia's fourth-quarter (Q4) consumer price index (CPI). This will indicate whether the Reserve Bank of Australia (RBA) will opt to cut interest rates in February for the first time since November 2020 or maintain the current rate of 4.35%.

Q4 CPI figures

Date: Wednesday, 29 January at 11.30am AEDT

In the third quarter (Q3), headline inflation rose by 0.2%, bringing the annual rate to 2.8% year-on-year (YoY), the lowest since the March 2021 quarter. This decline was largely expected, driven by drops in electricity prices (-17.3%) due to government rebates and automotive fuel prices (-6.7%).

The RBA's preferred inflation measure, the trimmed mean, increased by 0.8% in Q3 2024, reducing the annual rate to 3.5% from 4.0%, marking seven consecutive quarters of decline.

Encouraging signs were also seen in the latest monthly CPI indicator for November, released in early January. It showed a 2.3% YoY rise, with annual trimmed mean inflation easing to 3.2% from 3.5% in October.

For Q4 2024, expectations are for a 0.2% quarter-on-quarter (QoQ) rise in headline inflation, slowing the annual rate to 2.2%. The core measure, trimmed mean inflation, is expected to grow by 0.6% QoQ, easing the annual rate to 3.3%.

The Australian interest rate market is increasingly confident that inflation figures in line with these expectations will prompt the RBA to cut rates by 25 basis points (bp) to 4.10% in February, with this outcome being 65% priced in.

AU all groups CPI and trimmed mean chart

AUD/USD technical analysis

In late September 2024, AUD/USD hit resistance at 0.6900 - 0.6910, drawn from the 0.8007 high of February 2021 and the 1.1081 high of July 2011.

The downturn continued in mid-December, with AUD/USD dropping below trend line support at around 0.6370 - 0.6350 and reaching a nearly five-year low of 0.6131 in early January 2025.

AUD/USD weekly chart

From the late September high of 0.6942 to the January low of 0.6131, AUD/USD fell over 11.5% in 14 weeks.

In light of this decline, the recent rebound from 0.6131 to last Friday's high of 0.6330 appears more corrective than impulsive. This perspective holds unless AUD/USD surpasses resistance at roughly 0.6350 and exceeds the 200-day moving average (MA), currently at 0.6577.

If the 0.6130 support level breaks, AUD/USD could test the significant psychological level of 0.6000.

AUD/USD daily chart

• _{Source: TradingView. The figures stated are as of 28 January 2025. 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.}