Inflation Hits 3.5-Year Low Boosting Dovish Expectations
Australian CPI data released for May showed a continued disinflationary trend across key categories. Headline CPI slowed to 2.1% year-on-year, matching weighted CPI for the same period. The trimmed-mean inflation figure dropped to 2.4%, its lowest point in nearly four years.
This represented a 0.4 percentage point fall in May—the sharpest monthly decline in five months. On a monthly basis, headline CPI was flat at 0.0%, highlighting easing consumer price pressures. These results bring all inflation measures comfortably within the RBA’s 2–3% target range.
Money Markets Reflect Growing Certainty of July Rate Cut
Australian money markets are increasingly pricing in a July interest rate reduction. The 1-month overnight index swap sits at 3.7%, implying a 60% probability of a 25bp rate cut. Meanwhile, RBA cash rate futures imply nearly 90% certainty of a rate cut to 3.6%. The 90-day bank bill futures market has fully priced in a rate reduction for July. Yields on the 3-year Australian government bond have also dropped to 3.6%. These movements suggest a broad market consensus for a monetary policy shift by the RBA.
AUD/USD Trades Cautiously Despite Dovish Data Shift
Despite softer inflation data, AUD/USD remains range-bound near the 0.65 handle. The pair attempted a break above 65 cents but failed to close higher on Tuesday. Instead, price action drifted back to test key support zones around the 200-day moving average. Technical indicators point to exhaustion in the Aussie dollar’s rebound attempts. Currency pair technical analysis shows resistance near 0.6520 and support at 0.6420. A false breakout scenario remains likely, keeping bearish bias intact.
Yield Correlation May Reassert as Risks Stabilise
The historic correlation between AUD/USD and Australian bond yields may return. Global sentiment has calmed following de-escalation in the Israel-Iran conflict. Trump’s trade rhetoric has moderated, easing broader geopolitical uncertainty. With external risks easing, fundamental drivers like yield spreads may regain market focus. A drop in 3-year yields below 3.25% would strengthen downward pressure on the AUD/USD. This would align technical and macro perspectives for further downside in the Aussie.
Also Read: EUR/USD Outlook Shows Consolidation Near Resistance
AUD/USD Technical Set-Up Signals Potential Weakness
Daily price charts for AUD/USD show the formation of a bearish reversal pattern. A failed breakout above the 200-day SMA suggests further downside is likely. A strong bullish pinbar was quickly rejected, leaving resistance at the 0.65 zone. Price has now returned toward its medium-term average near 0.6420. Should the pair fail to reclaim 0.6500 soon, downside continuation becomes probable. Momentum indicators have rolled over, supporting short positions for traders.
Policy Outlook Dominates as July Meeting Nears
The RBA’s July 8 meeting is now in clear focus for traders and economists alike. With inflation well within target, maintaining current policy would seem unjustifiable. A 25bp rate cut would support the RBA’s credibility and align with incoming data trends. A rate cut would also help insulate the economy from lingering global shocks. Should the RBA delay, August remains a likely fallback as inflation pressures ease. However, market signals and inflation readings strongly favour a July move.
Conclusion: Bearish AUD/USD Outlook as RBA Cut Nears
The AUD/USD outlook, shaped by RBA-driven sentiment, signals a weakening bias ahead of July’s policy meeting. Australia’s disinflation trend is now entrenched, pushing policymakers toward rate cuts. Technical signals support further downside for AUD/USD in coming weeks. Market participants are aligning positions for a dovish shift and potential AUD softness. Currency traders should monitor yield correlations and policy rhetoric closely. The current macro and technical backdrop favours caution on the Aussie dollar’s near-term prospects. Stay tuned for updated AUD/USD forecast 2025, inflation signals, and further currency pair technical analysis.
