Mild CPI Data Triggers Slight Retreat
Australia's monthly Consumer Price Index (CPI) year-on-year growth rate for December was 2.5%, slightly below the market expectation of 2.6%. Although the gap is small, this result was enough to trigger short-term selling of the Australian dollar, with AUD/JPY sliding from the 97.80 region to a daily low near 97.30. This data indicates that inflation pressures are easing faster than expected, which may lead the RBA to consider rate cuts sooner than previously anticipated.
Market participants currently expect a 60% probability of a 25 basis point rate cut by the RBA at its February meeting, up from 45% before the CPI release. Typically, lower interest rate expectations exert pressure on a currency, so the Australian dollar's reaction aligns with this dynamic.
Technical Outlook: Bullish Structure Remains
Despite the retreat on the day, the AUD/JPY chart shows resilience in its bullish structure. The currency pair is trading above both the 50-day and 200-day moving averages, a classic signal of an upward trend. The 97.00 level has become a strong support zone, with the 50-day simple moving average (SMA) currently near 96.85, further solidifying this support. A break below this level would signal a potential trend reversal.
On the upside, resistance is located at the recent high of 98.50, followed by the psychological level of 99.00. The Relative Strength Index (RSI) has retreated from the overbought territory to around 55, indicating there is still room for further upside without immediate weakness.
Key Levels to Watch
Broader Context: Yen Weakness and Risk Appetite
The overall bullish trend for AUD/JPY is also supported by the continued weakness of the yen. The Bank of Japan (BOJ) maintains its ultra-loose monetary policy, keeping Japanese government bond yields low. In contrast, Australia's relatively higher yields continue to attract arbitrage trading, providing a favorable outlook for the Australian dollar against the yen.
Moreover, global risk appetite remains relatively robust, with easing inflation in major economies complementing expectations of a soft landing for the U.S. economy. The Australian dollar is often seen as a proxy for risk sentiment, benefiting in such an environment.
Wednesday's Australian CPI data triggered a slight pullback in AUD/JPY, but the overall technical and fundamental outlook remains bullish. The 97.00 support level is crucial in the coming days. If this support holds firm, the path to 98.50 and beyond remains the primary direction. However, a sustained drop below 96.50 could signal a deeper correction. Traders should keep an eye on upcoming Australian employment data and any BOJ policy signals for further directional guidance.