AUD/USD slides below 0.6950 as soft CPI fuels RBA rate-cut bets

Australian core inflation undershot expectations in the second quarter, sending the currency below 0.6950 and boosting bets the Reserve Bank will cut rates as soon as November.

Australian core inflation cooled more than expected in the second quarter, pushing the currency below 0.6950 and boosting bets the Reserve Bank will cut rates as soon as November.

"The downside surprise in core services inflation removes the last hurdle for an RBA pivot," said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities. "Markets will now price a higher probability of a first-quarter 2027 cut, possibly pulling it forward to late 2026."

The Australian dollar fell as much as 0.6% to 0.6942, its weakest level since early July, before paring some losses to trade near 0.6955. The move followed data showing the Reserve Bank's preferred measure of core inflation rose at an annual pace below consensus estimates, according to Bloomberg. The softer print contrasts with stickier inflation in the U.S. and parts of Europe, widening the rate differential in favor of the dollar.

The data gives the RBA room to ease its policy stance after holding the cash rate at 4.35% since November 2024. The next RBA meeting on Aug. 5 will be watched for any change in forward guidance, with markets reassessing the timing of the first rate cut.

The Aussie's breakdown below 0.6950 marks a reversal from its recent range-bound trading between 0.7000 and 0.7100, where it had held since mid-June. The currency had been supported by resilient employment data — the jobless rate held at 4.4% in June, according to the Australian Bureau of Statistics — but the inflation print shifted the narrative toward slowing domestic demand.

Rate Differentials Widen

The AUD's yield advantage over the yen and euro has been a key draw for carry traders in 2026. A sustained break below 0.6950 could trigger stop-loss selling, accelerating the decline toward the 200-day moving average near 0.6880. The next major support sits at 0.6850, the June low.

The RBA's August meeting will be crucial. If Governor Michele Bullock acknowledges the softer inflation trend while maintaining a cautious tone, the market may consolidate. A more dovish tilt, however, could open the door to a test of 0.6800.

This article is for informational purposes only and does not constitute investment advice.