Australia's CPI slows, raising rate cut expectations

[Redator]

The Australian dollar is showing limited movement on Wednesday. In the European session, AUD/USD is trading at 0.6495, up 0.08% on the day.

Australian CPI falls more than expected

Australia's inflation rate headed lower in May. Headline CPI rose 2.1%, after gains of 2.4% in the previous three months. This was below the market estimate of 2.3%. Monthly, CPI eased to 0.4%, driven by lower petrol and housing costs.

The key core CPI indicator, annual trimmed mean inflation, also dropped sharply, to 2.4% from 2.8%, its lowest level since Nov. 2021.

The soft inflation report has boosted the case for the Reserve Bank of Australia to lower rates at the July meeting. The markets have priced in a 90% probability of a quarter-point cut, up from 81% prior to the inflation release. The markets have priced in three more rate cuts this year, following rate cuts in February and May.

The markets are counting on the RBA to be dovish in the second half of 2025. With inflation not only within the RBA's target of 2-3% but also falling, the markets expect that the RBA will be keen to lower rates in order to preserve economic growth.

Powell remains cautious about rate policy

Federal Reserve Chair Powell testified before a House Committee on Tuesday and had a cautious message for lawmakers. Powell said that the Fed was committed to keeping inflation contained and that the Fed planned to maintain rates until the impact of tariffs on inflation was more clear and reiterated that inflation still remained above the Fed's 2% target.

Powell has faced blistering criticism from President Trump for not lowering rates. In his testimony, Powell said that Trump's attacks were "having no effects" on Fed policy.

AUD/USD Technical

AUDUSD 4-Hour Chart, June 25, 2025

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