The Australian Dollar weakened against the Japanese Yen, with the AUD/JPY pair declining to around 113.65 during the early European session on Thursday, marking a 0.65% drop for the week [1]. This move followed the release of Australia's headline Consumer Price Index (CPI) inflation, which eased to 3.8% year-on-year in June from 4.0% in May, coming in below market expectations of 4.0% [1]. The softer inflation data significantly reduced market expectations for an imminent interest rate hike by the Reserve Bank of Australia (RBA), with market pricing for an August hike dropping from nearly 21% to about 3% to 4% after the report, according to Reuters [1].
TD Securities noted that the lower-than-expected inflation print should ease immediate policy concerns at the RBA, highlighting that the core inflation measure, the Q2 trimmed mean, printed at 3.6% year-on-year—below the RBA's May forecast of 3.8% [1]. This suggests that underlying price pressures are moderating relative to the central bank’s earlier projections, reinforcing the view that the RBA is likely to remain on hold in the near term [1].
Meanwhile, attention is turning to Japan, where traders are awaiting the Tokyo CPI inflation report and the Bank of Japan (BoJ) interest rate decision scheduled for Friday [1]. The BoJ is widely expected to keep its policy rate steady at 1.0%, following a hike in June to a 31-year high [1]. However, policymakers are signaling a hawkish outlook due to the weak Yen and rising import costs, with analysts polled by Reuters expecting the BoJ to raise rates to 1.25% by the end of December, and possibly as early as October [1].
Market participants are closely monitoring the BoJ's quarterly outlook report and Governor Kazuo Ueda's press conference for further guidance on the timing of future rate hikes [1].
CONCLUSION
Softer-than-expected inflation data in Australia has sharply reduced market expectations for an imminent RBA rate hike, pressuring the Australian Dollar against the Yen. Meanwhile, the market is focused on the BoJ's upcoming policy decision and outlook, which could further influence the AUD/JPY cross. The near-term outlook suggests limited upside for the Aussie unless inflation pressures re-emerge.