Australian dollar rises as CPI falls to 3.5-year low

The Australian dollar has broken a three-day skid and is in positive territory on Wednesday. In the North American session, AUD/USD is trading at 0.6577, up 0.26%.

Australia’s inflation rate fell below 2.8% y/y in the third quarter, down sharply from 3.8% in the second quarter. This was the lowest level since Q1 2021 and was below the market estimate of 2.9%. Most important, inflation is back below the Reserve Bank of Australia’s target band of 2% to 3%. The drop in inflation was driven by lower prices for electricity and fuel.

The impressive decline in headline CPI was tempered by other inflation indicators. The trimmed mean measure, a key indicator of core inflation, eased to 3.5% from 4.0%, is still well above the target range. As well, services inflation crept up to 4.6% from 4.5%.

The inflation data has not changed market expectations for rate cuts at the Reserve Bank of Australia's Nov. 5 meeting. The markets have priced in a rate cut at just 10%, with an initial cut not unlikely until April or May 2025. The labor market remains robust, with low unemployment and sticky wage inflation, despite high interest rates and weak economic conditions.

The RBA will remain an outlier among central banks until it joins the club and starts lowering rates. However, sticky services inflation and a tight labor market support the case for holding interest rates, which means the RBA will stay on the sidelines again at next week’s meeting.

• AUD/USD is testing resistance at 0.6567. Above, there is resistance at 0.6589
• There is support at 0.6539 and 0.6517