Recent Australian inflation data has prompted a reassessment of the Reserve Bank of Australia's (RBA) monetary policy outlook, leading to notable moves in the Australian Dollar across major currency pairs. According to Brown Brothers Harriman’s Elias Haddad, the AUD/USD pair slid toward 0.7136 and is expected to stabilize closer to 0.7000, in line with Australia–US 2‑year yield spreads [1]. April's headline Consumer Price Index (CPI) in Australia dipped more than expected to 4.2% year-over-year (consensus 4.4%, March: 4.6%), while the trimmed mean CPI matched consensus at 3.4% versus 3.3% in March [1]. This mixed inflation print, with a softer headline but firm underlying measure, led to a paring back of RBA rate hike expectations, with cash rate futures trimming bets of a 25 basis point hike by year end [1].
The RBA currently holds its cash rate at 4.35%, which is near the top of model-based central estimates of the nominal neutral rate, and projects real GDP growth to remain below potential over the next two years [1]. The central bank continues to focus on underlying inflation measures from the quarterly CPI, with Q2 data due at the end of July [1].
In the AUD/NZD cross, the Australian Dollar has lost more than 1.2% in a single day—a decline not seen since the end of 2019—amid narrowing rate differentials between Australia and New Zealand [2]. While the RBA’s tightening cycle appears to be losing momentum due to cooling domestic indicators, the Reserve Bank of New Zealand (RBNZ) has maintained a hawkish stance, strengthening the New Zealand Dollar [2]. Societe Generale analysts highlight that the shrinking interest rate differential is expected to drag AUD/NZD lower, with a break below 1.2130 (50-day moving average) opening the way to 1.20 [2].
Commerzbank notes that the lower-than-expected inflation metrics justify a pause in RBA rate hikes, despite trimmed-mean inflation remaining a warning sign [2]. The bank expects the RBA to halt its rate-hiking cycle for the time being, removing immediate upward momentum for the Australian Dollar [2]. Both Societe Generale and Commerzbank anticipate a downward or capped trend for the AUD, particularly against the Kiwi, as the yield advantage diminishes [2].
CONCLUSION
Mixed Australian inflation data and underwhelming employment figures have led markets and analysts to expect an extended pause in the RBA's tightening cycle. This shift has weakened the Australian Dollar against both the US Dollar and New Zealand Dollar, with analysts projecting further downside as rate differentials narrow. The market takeaway is a bearish outlook for the AUD in the near term.