Australian inflation rate eases to 4.9% in July, reducing hawkish RBA expectations.

• The Consumer Price Index (CPI) rose by 4.9% in July, which was below economists' prediction of 5.2%.

• Annual price increases were mainly driven by the housing sector, while automotive fuel and fruits played a role in moderating the overall inflation rate.

• When excluding volatile items, the yearly inflation rate decreased from 6.1% to 5.8%.

Australian Monthly CPI Analysis

Following positive Australian retail sales data earlier this week, market attention shifted to inflation figures. The combination of mixed economic indicators has created uncertainty regarding the Reserve Bank of Australia's (RBA) monetary policy. While the RBA aims to control inflation, an increase in consumer spending and price inflation could have prompted expectations of further RBA measures to achieve inflation targets.

However, the Monthly Consumer Price Index (CPI) Indicator revealed that inflation increased by 4.9% in July, compared to 5.4% in June. Economists had projected an increase of 5.2%.

Key findings from the Australian Bureau of Statistics (ABS) include:

• Housing (7.3%) and food and non-alcoholic beverages (5.6%) contributed the most to annual price increases.
• Automotive fuel (-7.6%) and fruit and vegetables (-5.4%) contributed to the softer headline figure.
• Excluding volatile items such as automotive fuel, fruit and vegetables, and holiday travel, the annual inflation rate decreased from 6.1% to 5.8%.
• The Monthly Consumer Price Index Indicator reached its peak at 8.4% in December 2022.

The lower inflation numbers, combined with the latest employment figures, provide the RBA with a valid reason to maintain a cautious approach. In July, the Australian unemployment rate rose from 3.5% to 3.7%. This increase in unemployment should alleviate wage growth pressures and demand-driven inflationary pressures.

Impact on AUD/USD Exchange Rate

Before the release of the inflation figures, the AUD/USD pair initially rose to a pre-stat high of $0.64832 before declining to a low of $0.64740.

However, in response to the inflation figures, the AUD/USD pair surged to a post-stat high of $0.64729 before retracing to a low of $0.64495.

As of this morning, the Australian dollar experienced a 0.37% decrease, trading at $0.64566.

Upcoming Economic Events

The US economic calendar will attract interest this afternoon, particularly the second estimate GDP figures for the second quarter and the ADP employment change figures for August.

JOLTs Job Openings suggest a significant shift in labor market conditions, as job openings declined from 9.165 million to 8.827 million in July. A lower-than-expected increase in employment change would reduce expectations of further interest rate hikes by the Federal Reserve (Fed).

Economists anticipate the ADP to report a 195k increase in employment, compared to a surge of 324k in July.

While attention will be given to the second quarter GDP figures, unless substantial downward revisions occur, the ADP figures are expected to have a more significant impact on the Fed's decision-making and market risk sentiment.