Monthly Wrap: AUD – Australian dollar weakens amid cooling inflation 

Key takeaways:  

• Cooling inflation pressures AUD 
• RBA maintains hawkish tone, softening rate cut bets 
• AUD monthly lows: £0.51, $0.64, €0.60, NZ$1.06, CA$0.87 
• AUD monthly highs: £0.52, $0.67, €0.61, NZ$1.08, CA$0.89 

The Australian dollar began January on firm footing, with a sense of optimism at the start of the new year helping to buoy AUD demand. 

The ‘Aussie’ then began to weaken as the month went on. Australian employment data printed significantly below expectations, with employment falling by 65,100 in December. This marked the first fall in three months, and sparked speculation that the Reserve Bank of Australian (RBA) may begin to cut interest rates sooner than expected. 

The consumer price index for fourth quarter 2023 also cooled below expectations, printing at 4.1% versus the 4.3% forecast. This further amplified interest rate cut bets amongst AUD investors, contributing further headwinds. 

Risk appetite also played a significant role in shaping AUD over the past month. Due to escalating geopolitical tensions in the Middle East, market sentiment has grown increasingly cautious, undermining the risk-sensitive ‘Aussie’ against its safer peers. 

At the beginning of February, the ‘Aussie’ enjoyed modest support following the latest interest rate decision from the RBA. While the bank left interest rates unchanged, hawkish assertions in their accompanying guidance lifted AUD exchange rates.  

Moving forward, a number of notable domestic data releases are likely to drive movement in the Australian dollar over the coming month. 

In mid-February, Australia’s latest jobs data is expected to report unemployment rose to 4% in January. Additional signs of a cooling labour market are likely to weaken the ‘Aussie’ against its peers. 

The RBA are set to publish the minutes from their latest minutes towards the end of February. If they skew hawkish, the Australian dollar could strengthen.