Australia’s May headline CPI eased to 4.0% year-on-year, undershooting the 4.3% consensus and TD Securities’ 4.2% call, versus 4.2% previously. Core inflation proved firmer: the trimmed mean ticked up to 3.6% y/y, against 3.5% expected and 3.4% prior. The softer headline reading was tied to transport inflation slowing to 3.3% y/y from 6.6% as fuel price inflation cooled to 7.7% from 18.6%. TD Securities said the Reserve Bank of Australia focuses on the trimmed mean and pointed to a rising month-on-month trend, leaving the possibility of an August rate rise intact.
On the labour market, TD Securities expects employment to rebound by 40k in May, above a 30k consensus and following April’s -18.6k fall. It attributed the prior decline to the Australian Bureau of Statistics’ new Labour Force Survey collection system and the timing of the long Easter holidays. Under that forecast, the unemployment rate is seen edging down to 4.4%, though weak consumer sentiment and lower capacity utilisation were cited as risks that could lift joblessness in coming months.
RBA Policy Outlook and Market Reaction
Given the current date of June 24, 2026, we are paying close attention to the core inflation data rather than the headline figure. While headline Consumer Price Index (CPI) slowed to 4.0%, the trimmed mean inflation that the Reserve Bank of Australia (RBA) focuses on actually accelerated to 3.6%. This keeps the RBA on high alert and solidifies the odds of an August rate hike, which markets are now pricing with a probability of over 60%.
This hawkish stance from the RBA, while other central banks are considering rate cuts, should provide a tailwind for the Australian dollar. We believe there is an opportunity for the AUD/USD to strengthen from its current level of around 0.6650 towards the 0.6800 mark in the coming weeks. Historically, periods of RBA hawkishness, like in late 2023, have led to significant AUD outperformance.
In the interest rate markets, this outlook suggests positioning for higher short-term yields. The Australian 2-year government bond yield, currently near 4.10%, looks vulnerable to a move higher if upcoming data supports the case for a rate hike. We can express this view through instruments like interest rate swaps or by selling short-dated bond futures contracts.
Key Data Risks and Trading Strategies
The upcoming May employment report is the next major catalyst we are watching. We anticipate a strong rebound of 40,000 jobs, which would likely push the unemployment rate down and give the RBA more confidence to tighten policy. A strong print would almost certainly lock in expectations for an August hike and trigger immediate market movement.
However, we must acknowledge the underlying risk posed by weak consumer sentiment, with confidence levels hovering near historic lows. This economic fragility introduces uncertainty and points towards increased market volatility. Therefore, using options strategies, such as buying straddles ahead of key data releases, could be a prudent way to trade the expected price swings without taking a purely directional bet.
