Monetary policy divergence: Australia & Eurozone CPI and the EUR/AUD tumble

• RBA's hawkish stance (potential 25bps hike due to sticky core inflation) diverges from ECB's "steady hand" approach (2.0% headline target met).
• Australian core inflation (3.2%) remains stubbornly above the RBA's target, increasing the probability of a "preventative" rate hike despite a moderation in the headline CPI (3.4%).
• Monetary policy divergence drove the EUR/AUD cross to a 15-month low (1.7300) as markets price in a potential RBA hike and price out further ECB tightening.

Australia’s latest Consumer Price Index (CPI) data, released this week on January 7, 2026, presents a complex puzzle for the Reserve Bank of Australia (RBA) as it prepares for its February board meeting. Headline inflation moderated to 3.4% in the year to November, down from 3.8% in October and notably below the market consensus of 3.6%. While the "undershoot" initially eased immediate fears of a February hike, a closer look at the underlying metrics suggests the RBA remains in a difficult position. The Trimmed Mean, the central bank’s preferred measure of core inflation, only ticked down slightly to 3.2%, remaining stubbornly above the RBA’s 2%-3% target band. Furthermore, stickier components like housing costs (up 5.2%) and a surge in electricity prices (up 19.7% following the rollback of state rebates) indicate that domestic price pressures are far from extinguished.

From a policy perspective, this "disinflationary breath" provides the RBA with some optionality, but it likely won't be enough to shift its hawkish stance. While headline figures are moving in the right direction, the persistence of services inflation and a tight labor market mean the risk of a "wait-and-see" approach turning into a policy error remains high. Major lenders like CBA and NAB continue to forecast a 25-basis-point hike to 3.85% in February, arguing that the RBA must act to prevent inflationary expectations from becoming entrenched. According to Bloomberg, the futures market positioning reflects that 22.3% of participants anticipate a 25 bps interest rate hike for the February 3rd 2026 meeting, a drop from 36.0% ahead of yesterday’s CPI release.

Consequently, the upcoming December quarter CPI print (due late January) will be the final arbiter; unless it shows a more aggressive softening in core services, the RBA may still opt for a "preventative" hike to ensure inflation returns to the midpoint of its target by 2027.

The Eurozone’s preliminary CPI data, released on January 7, 2026, marks a significant milestone as headline inflation finally hit the European Central Bank’s (ECB) 2.0% target, falling from 2.1% in November. This "bullseye" reading suggests that the aggressive tightening cycle of previous years has successfully anchored price stability. The cooling was largely driven by a sharp contraction in energy prices (down 1.9% year-on-year), which acted as a powerful tailwind. However, the ECB’s "mission accomplished" moment is tempered by core inflation, which remains more resilient at 2.3%. While this is an improvement from the 2.4% seen in late 2025, the persistence of services inflation at 3.4% remains the primary source of anxiety for Frankfurt, reflecting a labor market that is cooling but not yet loose.

For the ECB’s Governing Council, this data reinforces a "steady hand" approach for the upcoming February meeting. With headline inflation at target and growth projected to be a modest 1.2% for 2026, there is little immediate pressure to hike further, yet the stubbornness of service costs makes aggressive rate cuts equally unlikely. Markets are currently pricing in a period of prolonged stability, with the deposit rate expected to hold at 2.00% throughout much of the year.

Unlike the RBA, which faces a potential hike, the ECB is in a "luxury position" where it can afford to wait and see if the current restrictive stance causes inflation to dip slightly below target before considering any further easing to support the Eurozone’s fragile recovery.

The movement in the EUR/AUD cross over the past few weeks has been a textbook example of monetary policy divergence playing out in real-time. Since mid-December, the pair has faced significant downward pressure, sliding from levels near 1.7600 to a 15-month low around 1.7300 as of early January 2026. This trend is driven by two opposing narratives: an ECB that has reached its "inflation bullseye" and an RBA that is still fighting a re-emergence of domestic price pressures. With Eurozone headline inflation hitting the 2.0% target, the market has effectively priced out any further tightening from Frankfurt, leading to a "sell the fact" reaction on the Euro. Conversely, the Australian Dollar has found "extra fuel" from sticky underlying inflation; even though Australia's headline CPI dipped, the persistence of core measures above 3% has shifted market bets toward a potential 25-basis-point hike in February.

This widening yield differential is further compounded by a broader shift in global risk appetite. While the Euro has been weighed down by geopolitical jitters—ranging from regional budget dysfunctions to external tensions—the Aussie has benefited from a resilient labor market and improving macro sentiment regarding its major trading partners. Technically, the break below the 1.7400 handle suggests that the path of least resistance for EUR/AUD remains to the downside. Traders are increasingly treating the Aussie as a high-yield play relative to the Euro, creating a "carry-trade" incentive that could see the pair test the 1.70 psychological support level if the RBA follows through with a hawkish shift at its next meeting.

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• R2 (Resistance 2): 1.79556 – Represents the major high-water mark and secondary resistance for the current period.
• R1 (Resistance 1): 1.77782 – The immediate barrier to the upside, roughly coinciding with the previous consolidation zone.
• P (Pivot Point): 1.76296 – The central "neutral" zone; price is currently trading well below this, signaling a bearish bias.

S1 (Support 1): 1.74522 – The price has recently breached this level to the downside, turning it from former support into potential "new" resistance.

S2 (Support 2): 1.73036 – This is the critical target for the current move. As shown on the chart, the price (1.73846) is currently gravitating toward this floor.