The Australian Dollar experienced significant declines against both the Japanese Yen and the US Dollar following the release of softer-than-expected inflation data from Australia. The AUD/JPY cross extended its retracement from recent highs, falling to an over one-week low around the 113.60 region after the Australian Bureau of Statistics reported a Consumer Price Index (CPI) increase of 3.8% year-over-year in June, below both the previous month's 4% and consensus estimates of 4% [1][2]. The monthly CPI print also missed forecasts, falling by 0.1% in June, marking the second consecutive monthly decline [1][2]. The RBA weighted median CPI rose 3.6% YoY during the same period [2].
This softer inflation report led traders to unwind expectations for a near-term Reserve Bank of Australia (RBA) rate hike, exerting heavy selling pressure on the Australian Dollar [1][2]. The AUD/USD pair depreciated for the second consecutive day, trading around 0.6970 during Asian hours on Wednesday [2]. Meanwhile, the Japanese Yen drew support from speculation that authorities might intervene to prop up the currency, further pressuring the AUD/JPY cross [1]. However, the wide interest rate gap between Japan and other major economies, including Australia, limited further gains for the Yen [1].
Geopolitical tensions also influenced market sentiment, as risk aversion escalated following an Iranian attack targeting US troops in the Middle East. Iran fired multiple ballistic missiles toward a US base in Jordan, but all were successfully intercepted according to US military statements and video footage [2][3]. This event contributed to a risk-off environment, supporting the US Dollar and weighing on risk-sensitive currencies like the Australian Dollar [2][3].
Looking ahead, investors are closely monitoring the upcoming Bank of Japan policy decision on Friday and the Federal Reserve's policy announcement, where the Fed is widely expected to leave rates unchanged. Traders are currently pricing in a 30.5% chance of an immediate Fed rate hike and a 76.6% probability of a rate increase in September, suggesting that borrowing costs could remain elevated for longer [2][3]. Economic risks from the Middle East crisis and these central bank decisions are prompting caution among investors, with some analysts suggesting that further declines in AUD/JPY may be limited and could present buying opportunities amid mixed fundamental cues [1].
CONCLUSION
Softer Australian inflation data has triggered a sharp selloff in the Australian Dollar, as markets scale back expectations for a near-term RBA rate hike. Heightened geopolitical tensions and upcoming central bank decisions are adding to market uncertainty, reinforcing risk aversion and supporting the US Dollar and Japanese Yen. Investors remain cautious, awaiting further policy signals before making new directional bets.