Australia’s recent inflation surprise has disrupted the RBA’s projections, eliminating expectations for immediate rate cuts and even introducing the possibility of an increase. Given the persistent underlying pressures and a shift towards a hawkish market pricing, AUD/USD appears to be transitioning into a new phase, and technical indicators suggest a diminishing bearish trend, which could enhance upside potential if global conditions remain favorable. CPI exceeds expectations in both headline and trimmed mean, with results surpassing the target, and housing and services inflation continue to exhibit persistent elevation, while market pricing adjustments reduce expectations, suggesting a potential hike risk. The AUD/USD rebound is modest; however, technical indicators suggest there is potential for upside movement. Australia’s inaugural complete monthly CPI release provided a stark reminder for those anticipating additional rate cuts from the RBA, as headline inflation accelerated to an annual pace of 3.8%, surpassing the 3.6% anticipated, while the trimmed mean rose to 3.3%, significantly exceeding the 3.0% prediction, with both readings above the RBA’s 2–3% target band and diverging from it, indicating that the recent decline in inflation has probably reached its lowest point.
This is noteworthy as the RBA’s inflation mandate centers on the 2.5% midpoint, with its policy framework presuming that underlying inflation drives headline inflation, and today’s data strengthens that assumption in the most unfavorable manner: underlying pressures are solidifying, not diminishing, complicating the case for immediate policy relief. The composition contributes to the unease, with housing inflation—the largest CPI basket component—showing further strengthening; rents increased 4.2% over the year, rising from 3.8% in September, partly due to a reduced offset from Commonwealth Rent Assistance, which otherwise would have pushed rents to 4.5%. New dwelling prices rose 1.7%, and rising electricity costs reinforce persistent housing pressures. Service prices stand at 3.9%, non-tradables at 4.8%, both driven domestically and supporting the broad stickiness in prices. While this is the first monthly CPI release and introduces uncertainty, it aligns with the robust Q3 inflation report and is difficult for the RBA to dismiss. For those anticipating rate cuts, this represents a setback, suggesting the battle against inflation is ongoing.
The inflation data alone may not have been enough to disturb rate-cut expectations, yet market pricing undeniably reinforces this shift, with swaps suggesting a peak of 11 bps of easing by May 2026 and a slight possibility of a hike six months later—a significant move from earlier expectations that saw the cash rate bottom below 3%. The remaining pricing for cuts resembles a protective hedge against severe economic deterioration, such as a sharp rise in unemployment or a global recession. In the absence of such shocks, the easing cycle looks effectively over. AUD/USD continued its recovery from below the 200DMA after the release, though the movement appears muted relative to the signal, likely due to strength in the Kiwi following the RBNZ’s shift to neutrality. Selling pressure in AUD/NZD may be capping the Australian dollar’s upside for now. Still, AUD/USD’s trajectory suggests a possible test of 0.6520, a key support-turned-resistance level. Above that, the 50DMA and September downtrend are critical, and a break could open the path to 0.6625, 0.6660, and 0.6700; to the downside, the 200DMA and 0.6419 remain key levels.
The RSI (14) and MACD indicate fading downside momentum, suggesting bears are losing grip even if a clear bullish signal is not yet present. As easing cycles from both the RBA and RBNZ near their end, today’s developments hold important implications for AUD and NZD, particularly as market expectations for Fed rate cuts continue to rise. This dynamic points to growing upside potential for AUD/USD and NZD/USD, provided no significant risk-off event emerges.