Australian Dollar: May Rate Cut Now More Likely

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Monthly inflation undershoots expectations.

Australia's monthly inflation tracker undershot expectations, prompting one of the country's biggest banks to raise the odds of an interest rate cut in May.

Inflation rose 2.4% in February said the ABS, which was down on the previous month's 2.5% and below a consensus expectation for a repeat 2.5%.

The monthly tracker is not a complete inflation reading, but does go some way in pointing to where the quarterly print is heading.

The Australian Dollar dropped in the immediate aftermath of the release, confirming an expectation that the odds of a May interest rate cut at the Reserve Bank of Australia (RBA) edged higher in the wake of the release.

Commonwealth Bank of Australia's economists say they are now more confident of another inflation undershoot, revising down their Q1 2025 headline CPI forecast to 0.8%/qtr.

At 2.4%, the monthly tracker is in the bottom half of the Reserve Bank of Australia's inflation band for the past six months.

Analysis by CBA shows all monthly measures of core inflation show the underlying pulse further softening.

The bank maintains a call for the Q1 25 trimmed mean CPI - a measure of core inflation used by the RBA - to print at 0.6%/qtr, putting it below the RBA’s latest forecast.

"That leaves us with a higher conviction for a May rate cut," says Stephen Wu, Senior Economist at Commonwealth Bank.

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The Australian Dollar fell following the release of the inflation data but soon pared that decline and is now outperforming the majority of its G10 peers on the day, confirming global sentiment remains in charge of the Aussie.

Recovering U.S. markets suggest the recent selloff has ended, allowing investors to take more risks and pick up some discounts. This is ultimately feeding an outperformance in 'high beta' currencies, like AUD.

Expect AUD upside to be limited, however, as the U.S. is about to massively expand its tariff programme on April 02.

The reciprocal tariff announcement will be the largest of Donald Trump's second term, with analysts anticipating significant implications for global financial markets.

The lesson of 2025 has been U.S. equity markets and the Australian Dollar have underperformed amidst rising tariff rates and associated uncertainties; more of the same might be in store in April.

"If market participants are caught flatfooted by larger than expected US tariffs and retaliation by other governments next week, AUD/USD can test 0.60 in coming weeks in our view," says Kristina Clifton, Senior Currency Strategist at Commonwealth Bank.