Synopsis:

ING reports a significant reaction in the Australian dollar following higher-than-expected inflation data for Q1. The inflation figures, showing sustained high core rates and a headline rate of 3.6% YoY, have led to adjustments in monetary policy expectations and bolstered the AUD.

Key Points:

• Inflation Data Overview: Australia's Q1 inflation data surpassed expectations, with core inflation measures remaining above 4% and the headline rate decelerating slightly to 3.6% year-on-year. The March CPI specifically exceeded forecasts at 3.5%, against a consensus of 3.4%.

• Market Reaction: Following the release, Australia’s two-year swap rate saw a significant jump of about 15 basis points, reaching its highest level since November 2023. This reflects a shift in market expectations, notably pricing out any rate cuts for the remainder of the year, leaving only a minimal 8 basis points of easing expected by the December meeting.

• RBA Policy Outlook: Despite the hot inflation figures, ING assesses that another rate hike is not entirely necessary, suggesting that the Reserve Bank of Australia (RBA) might achieve its inflation targets without further rate increases. However, the central bank is expected to approach any dovish policy shifts with increased caution given the persistent inflation pressures.

• Impact on AUD: These developments have positively impacted the Australian dollar, which has climbed back above the 0.6500 mark. The AUD is positioned to benefit from delayed policy easing expectations and remains one of the currencies likely to be supported in a stable risk environment, albeit still vulnerable to shifts in global risk sentiment.

Conclusion:

The recent Australian inflation data has notably shifted market dynamics and monetary policy expectations, strengthening the AUD against major counterparts. ING highlights that while the RBA may avoid further rate hikes, cautious communication will likely prevail due to the ongoing inflation concerns.