The Australian Bureau of Statistics (ABS) will release the Consumer Price Index (CPI) for February on Wednesday at 00:30 GMT, with inflation expected to hold steady at 3.8% YoY and come in flat on a monthly basis. This release comes as the Reserve Bank of Australia (RBA) has already raised its key rate to 4.10%, highlighting concerns over persistent inflation. Policymakers remain focused on potential second-round effects, while markets increasingly anticipate another rate hike in the coming months.
Meanwhile, geopolitical developments are playing a growing role in inflation expectations. Escalating tensions in the Middle East and disruptions to energy supply routes are pushing Oil prices higher, which could soon feed into Australian inflation in the months ahead.
Ahead of the release, AUD/USD is pulling back on the day, trading near recent lows around 0.6960, as the US Dollar (USD) stabilizes following its recent decline.
What to expect from Australia’s inflation rate numbers?
February inflation data is expected to show broadly stable price pressures, but still above the RBA’s 2%-3% target range. Markets expect annual inflation to remain unchanged at 3.8% for a third consecutive month, while the monthly reading is seen falling to 0% after 0.4% in January. The RBA’s preferred inflation gauge, the Trimmed Mean CPI, is also expected to hold steady at 3.4% YoY.
However, these figures should be interpreted with caution. The February data does not yet fully reflect the recent surge in energy prices driven by the Middle East war and disruptions in the Strait of Hormuz.
According to Westpac, fuel prices actually declined during the period, partially masking underlying inflationary pressures. At the component level, housing-related costs such as rents and electricity continue to rise, alongside education and clothing prices, while lower fuel and travel costs help contain headline inflation.
Looking ahead, risks are clearly tilted to the upside. Westpac expects inflation to rise to around 4.6% YoY in the June quarter due to the energy shock. While the direct impact on core inflation is expected to be more limited, second-round effects via wages and inflation expectations remain a key concern.
In this context, markets continue to price in a hawkish bias from the RBA, with rising expectations of further rate hikes in the months ahead.
How could the Consumer Price Index report affect AUD/USD?
In this environment, an in-line inflation reading may have a limited impact on the Australian Dollar (AUD), as markets are already aware that energy-related inflation pressures are still in the pipeline.
However, a stronger-than-expected print, particularly in the Trimmed Mean CPI, would reinforce expectations of further RBA tightening and support the Aussie.
On the other hand, a downside surprise could weigh on the Australian Dollar in the short term. That said, losses may remain limited, as markets are already anticipating a pickup in inflation driven by energy costs.
More broadly, AUD/USD direction will depend not only on domestic data but also on global risk sentiment and geopolitical developments, which continue to shape both inflation expectations and the outlook for monetary policy.
From a technical perspective, in the 4-hour chart below, AUD/USD near-term bias is mildly bearish as the pair holds beneath a descending resistance trend line, with price also trading below the 100-period Simple Moving Average (SMA) at 0.7059. The SMA has started to edge lower, indicating sellers retain the upper hand after the recent correction from the 0.7187 area. The Relative Strength Index (RSI) around 40 shows momentum leaning to the downside but not yet in oversold territory, suggesting room for further pressure while keeping scope for intermittent rebounds.
Immediate support is seen around 0.6950, where the horizontal line coincides with the latest downswing, followed by a lower support level around the 0.6900 level if selling extends. On the topside, initial resistance emerges near the 0.7060 region in line with the 100-period SMA, which would need to be reclaimed to ease current downside pressure. A sustained move above that area would open the way toward the trend-line zone around 0.7068, while failure to clear it would keep focus on the 0.6950 and 0.6900 supports.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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