Australia CPI set to show sticky inflation, fueling RBA hawkish bets

• The Australian Consumer Price Index is forecast at 3.6% YoY in December.
• The Reserve Bank of Australia is increasingly expected to begin an interest rate hike cycle this year.
• The Australian Dollar runs against its battered American rival, with a test of 0.7000 on the table.

Australia will release the Consumer Price Index (CPI) report on Wednesday, and it is expected to show inflation rose 3.6% year over year in December, slightly above the previous reading of 3.4%. The monthly CPI is foreseen at 0.7% after posting 0% in November.

The Australian Bureau of Statistics (ABS) will also release the Trimmed Mean CPI, the Reserve Bank of Australia’s (RBA) favorite inflation gauge. The annual figure is expected to print at 3.2%, matching the previous reading, while on a monthly basis, the Trimmed Mean CPI is forecast at 0.2%, down from the 0.3% posted in the previous month.

Data will be released one week ahead of the RBA monetary policy meeting, scheduled for February 2-3. The central bank last met in December, when policymakers decided to leave the Official Cash Rate (OCR) on hold at 3.6%. The monetary policy statement showed that the Board noted inflation has picked up more recently, and that data “suggest some signs of a more broadly based pick-up in inflation, part of which may be persistent and will bear close monitoring.”

Ahead of the CPI release, the Australian Dollar (AUD) trades above 0.6900 against the US Dollar (USD), its highest since September 2024

What to expect from Australia’s inflation rate numbers?

ABS data is expected to confirm what market analysts suspect: that the RBA’s next monetary policy move will be a rate hike.

As previously noted, the ABS is forecast to report that the annual CPI rose by 3.6% in the year to December, higher than the 3.4% posted in November and above the RBA’s goal of keeping inflation between 2% and 3%.

Resurgent inflationary pressures, coupled with a pretty solid labor market, boosted the odds of an interest rate hike in Australia coming up next. The ABS recently reported that the country added 62,500 new jobs in December, and that the Unemployment Rate dropped to 4.1%, its lowest in seven months. Even further, underemployment fell to a multi-decade low.

Before the release of inflation data, the odds of an RBA rate hike at the February meeting stand at roughly 63%, according to Reuters.

Meanwhile, the AUD/USD pair trades at its highest since September 2024 amid broad US Dollar (USD) weakness. Market players continue to drop the Greenback amid skyrocketing levels of uncertainty, most stemming from United States (US) President Donald Trump’s decision.

President Trump resumed his trade war against the world after indicating that, since Norway did not award him the Nobel Prize, he would now focus on protecting his country rather than global peace. He kept escalating tensions with Europe amid his desire to possess Greenland, a Danish territory close to the US land, claiming it’s critical to US defense. Mid-January, however, he de-escalated tensions by announcing the framework of a deal, but without any details on the matter, market participants remain wary. Trump also threatened higher tariffs on South Korea on Tuesday, as the Asian country’s legislature still had not approved the trade deal achieved last year.

The US President claimed he will soon announce the next Chair of the Federal Reserve (Fed), as Jerome Powell’s mandate finalizes in May. Market participants clearly anticipate a hawk, regardless of the name, and keep betting on rate cuts throughout 2026, something still quite unclear.

How could the Consumer Price Index report affect AUD/USD?

In this scenario, the anticipated inflation data should confirm the RBA’s hawkish stance as previously noted, and hence, result in a firmer AUD. Higher-than-anticipated readings will have the same effect, further boosting demand for the Aussie.

If the data comes in softer than expected but still above 3%, the scenario should remain the same, though the AUD’s advance will be more restrained. However, in the unlikely event that annual inflation falls below 3%, market players will rush to bet against an RBA interest rate hike and could see AUD/USD fall as an immediate reaction to the news. Sustained losses, however, seem unlikely given the USD situation.

Valeria Bednarik, FXStreet Chief Analyst, notes: “From a technical point of view, the AUD/USD pair has room to extend its advance, despite overbought conditions clear in the daily chart. The pair is currently trading near a multi-month peak in the 0.6950 price zone, and shows no signs of slowing its advance. The rally could continue initially towards the 0.7000 threshold, while once above the latter, there’s little in the way towards 0.7100.”

Bednarik adds: “In the case of a retracement, the pair will find near-term support in the 0.6890 region, when the pair will finally close the weekly opening gap. A slide below the latter exposes the next static support at 0.6830.