AUD/USD and NZD/USD React to Inflation Data; USD/JPY Holds After Fed Decision

Australian Dollar Weakens on Cooling Inflation and Rate Cut Expectations

The AUD/USD pair dropped on Wednesday following the release of Australian inflation data. The data revealed softer-than-expected inflation, raising expectations of a February rate cut by the Reserve Bank of Australia (RBA). Lower inflation indicates reduced pricing pressures, possibly prompting the RBA to ease monetary policy. A rate cut would likely make the Australian dollar less appealing to investors, increasing selling pressure on the currency.

The chart below shows that Australia’s CPI fell to 2.4% for the 12 months ending in December. Moreover, the trimmed mean CPI dropped to 3.2%, indicating a faster pace of disinflation than the RBA had expected. With quarterly trimmed mean inflation at 0.5%, the central bank has clear evidence that inflation is cooling. These cooling expectations increase the likelihood of a February rate cut, as the RBA prioritizes economic stability over inflationary risks.

Mixed Economic Signals Complicate RBA’s Rate Decision

However, some economic data still indicate resilience in the Australian economy. The Judo Bank Australian Composite PMI stayed above the expansion threshold of 50.3 in January 2025. The chart below shows an upward trend after three consecutive readings, suggesting gradual improvement. This indicates that the economy is still growing at a slower pace.

Additionally, the unemployment rate stood at 4.0% in December. The chart below shows a declining trend after peaking in 2020. However, the 2024 data indicate modest growth. A lower unemployment rate suggests strong consumer spending and wage growth, which could counteract inflationary cooling and potentially delay monetary easing.

Despite these economic signals, concerns over potential US tariffs on Chinese goods add to market uncertainty. White House Press Secretary Karoline Leavitt confirmed that President Donald Trump is still considering a 10% tariff on China, with a final decision expected in February. Since China is Australia’s largest trading partner, higher US tariffs on Chinese goods could weaken Chinese demand for Australian exports, further pressuring the Australian dollar.

The mixed economic signals, including steady PMI figures and stable unemployment, suggest that the RBA may wait for additional data before committing to a rate cut. If the central bank keeps rates steady, the AUD/USD could stabilize or even rebound, depending on market sentiment. However, if the RBA adopts a dovish policy stance, the Australian dollar may face further downside pressure, potentially testing new lows below 0.6200.

Japanese Yen Gains Amid BoJ Rate Hike Bets

The Japanese Yen (JPY) continues to strengthen against the US Dollar (USD) as expectations of further Bank of Japan (BoJ) rate hikes drive bullish sentiment. The minutes from the BoJ’s December meeting reveal discussions on using neutral interest rate estimates to guide future rate increases.

Additionally, former BoJ board member Makoto Sakurai highlighted solid economic growth, rising wages, and sustained price increases as key factors supporting gradual monetary tightening. The chart below shows this wage growth. The average monthly wage growth is 342k JPY/month, while cash earnings growth is 3%.

The narrowing US-Japan yield differential has increased demand for the lower-yielding Yen, pushing USD/JPY below the mid-154.00s. However, concerns over a potential global trade war caused by US President Donald Trump’s protectionist policies remain high. These uncertainties could limit aggressive bets on JPY appreciation.

Meanwhile, the Federal Reserve’s (Fed) decision to hold rates steady along with the hawkish stance has supported the US Dollar. Fed Chair Jerome Powell stated that the central bank is in no rush to adjust monetary policy, reinforcing expectations that rates will remain elevated for an extended period. These statements and the concerns that Trump’s tariff policies could fuel inflation are a tailwind for the US dollar.

Additionally, upcoming events, including the European Central Bank (ECB) policy decision and advanced Q4 US GDP data, could introduce further volatility in USD/JPY as traders assess the broader economic outlook.

AUD/USD Analysis – Symmetrical Broadening Wedge

The AUD/USD pair has been consolidating above the major support zone of $0.6040 to $0.6170. These consolidations form a symmetrical broadening wedge pattern. The price has been trading within the wedge’s boundaries, indicating strong volatility. The pair remains in consolidation following the release of inflation data. A break above $0.6340 could push the pair to higher levels, while a break below $0.6040 may extend the bearish trend.

NZD/USD Analysis – Inverted Head and Shoulders

The 4-hour chart for NZD/USD shows the pair forming an inverted head and shoulders pattern at the long-term support of $0.55–$0.56. Similar to AUD/USD, the pair also forms a symmetrical broadening wedge and consolidates around the long-term support. A break above $0.5720 could push the pair to higher levels, while a break below $0.55 may extend the downside move.

USD/JPY Analysis – Descending Channel

The 4-hour chart for USD/JPY shows that the pair is trading within a descending channel. This channel has formed within a symmetrical broadening wedge pattern, keeping the price range-bound. The strong support at this channel remains at $152.70. A break above $156.30 could resume the bullish trend, while a break below $152.70 may extend the downward momentum.