Australian Dollar remains subdued following CPI data, Fed decision eyed

AUD/USD holds losses as the US Dollar strengthens on safe-haven demand amid reports of an extended Iran blockade.
The Fed is expected to keep the federal funds rate unchanged at 3.50%–3.75% on Wednesday.
Australia’s annual CPI inflation rose to 4.6% in March from 3.7% prior, missing expectations of 4.7%.

Akhtar Faruqui FXStreet

AUD/USD extends its losses for the second successive day, trading around 0.7160 during the European hours on Wednesday. The pair depreciates as the US Dollar (USD) gains ground on safe-haven demand after reports that the United States (US) may extend its blockade on Iran, prolonging supply disruptions across the Middle East.

The Wall Street Journal reported on Wednesday that US officials said President Donald Trump has instructed aides to prepare for an extended blockade of Iran. The report noted that Trump opted to continue pressuring Iran’s economy and oil exports by restricting shipping to and from its ports. Sources added that he considers alternative options, such as resuming bombing or stepping away from the conflict, riskier than maintaining the blockade.

Moreover, the Greenback receives support from expectations that the Federal Reserve (Fed) may keep rates unchanged at Wednesday’s April meeting, maintaining the federal funds target range at 3.50%–3.75% for a third straight hold.

The AUD/USD pair came under pressure as the Australian Dollar (AUD) weakened following the release of a softer-than-expected inflation report. Data from the Australian Bureau of Statistics (ABS) on Wednesday showed that annual CPI inflation rose to 4.6% in March from 3.7% in February, largely driven by a fuel shock linked to the Middle East conflict. The reading, however, fell short of market expectations of 4.7%. On a monthly basis, CPI increased 1.1% in March, compared to the previous reading of 0%.

However, the downside for the Australian Dollar may be limited as traders price in expectations that the Reserve Bank of Australia (RBA) could deliver another interest rate hike in May, supported by a tight labor market and stronger-than-expected economic growth in late 2025.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

Author

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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