Australian dollar lower after soft CPI data

The Australian dollar has lost ground after Australia's CPI was lower than expected. In the European session, AUD/USD is trading at 0.6578, down o.37%. The Aussie continues to struggle and has declined 3.4% in January.

Australia's CPI eases to 3.4%

Australia's inflation rate continues to decline, which will be sweet music to the ears of central bank policy makers. CPI for Q4 2023 fell to 4.1% y/y, down sharply from 5.4% in Q3 and below the market estimate of 4.3%. Inflation has decelerated for a third straight month and has fallen to its lowest since November 2021. The drop in inflation was felt across the economy and goods and services inflation eased. A key core CPI indicator, the trimmed mean, fell to 4.2% y/y, down sharply from 5.2% and just below the market estimate of 4.3%. The decline in inflation was also apparent on a quarterly basis. CPI fell from 1.2% to 0.6% in the fourth quarter and the trimmed-mean CPI dropped to 0.8%, down from 1.2% in the third quarter.

The inflation report is the final key release before the Reserve Bank of Australia meets on February 6. The RBA isn't expected to start cutting rates until the second half of 2024 and it's a virtual certainty that the RBA will hold rates next week at 4.35%. The RBA hasn't signalled it will cut rates, but inflation has been moving in the right direction and the economy has been cooling down, with consumer spending falling and the labour market showing cracks.

This week's retail sales report was a reminder that consumers are being squeezed by the cost of living crisis. December retail sales plunged 2.7% m/m, as Black Friday sales contributed to the November reading of 1.6%. Consumers did their Christmas shopping early and that led to a very soft reading in December.

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AUD/USD Technical

• AUD/USD is testing support at 0.6583. Next, there is support at 0.6544
• There is resistance at 0.6613 and 0.6652