The exchange rate of the Australian dollar is at a crossroads! After three consecutive weeks of gains, hitting a high of 0.6439 in early December, the AUD/USD pair fell into a narrow range of volatility near the 0.6400 level on Monday (April 28). Market focus is on Australia's CPI data to be released this week and the election results on May 3. as these two events could determine the future direction of the Australian dollar.

‌‌Inflation Data May Catalyze Interest Rate Cuts‌

The quarterly inflation data to be released on Wednesday is highly anticipated, with markets widely expecting it to pave the way for interest rate cuts in May. Analysts forecast that Australia's first-quarter CPI will rise 0.8% quarter-on-quarter, with the year-on-year growth rate slightly falling back from 2.4% to 2.3%. More crucially, the trimmed mean core CPI is expected to return to the Reserve Bank of Australia's (RBA) target range of 2-3% for the first time since late 2021. Luci Ellis, chief economist at Westpac Banking Corporation, notes that although inflation data may be disappointing, uncertainties in the international situation have prompted the RBA to potentially take action early.

‌Markets Bet on Aggressive Easing Policies‌

Current swap trading shows that markets have fully priced in a 25 basis point interest rate cut in May, with the astonishing expectation of a cumulative five interest rate cuts throughout the year. This strong easing expectation is suppressing the upside momentum of the Australian dollar. Meanwhile, the New Zealand dollar remains near 0.5964 against the US dollar, having previously hit a five-month high of 0.6029. but the 0.60 level poses significant resistance.

‌Double Test of Politics and Economics‌

The election on May 3 adds uncertainty to the outlook for the Australian dollar. The latest polls show Prime Minister Albanese in the lead, and his promised cost-of-living relief policies, while popular with voters, have sparked concerns from S&P Global Ratings about Australia's AAA sovereign credit rating. Internationally, the progress of trade negotiations between major powers remains uncertain, with the Trump administration's tariff adjustment signals differing markedly from China's stance, further exacerbating market uncertainties.

‌Summary‌

The Australian dollar is facing a double test from domestic policies and the international environment. Inflation data may confirm the path of interest rate cuts, election results will influence the direction of fiscal policy, and changes in the international trade situation could bring unexpected shocks. Against such a complex backdrop, the outlook for the Australian dollar's upward momentum is uncertain. Besides the international trade situation, investors need to closely monitor the final outcomes of these two key events this week.