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The Australian Dollar firmed after inflation beat expectations.
"AUD/USD lifted by around 0.4% after the Australian Q1 25 CPI was a touch stronger than expected," says Samara Hammoud, Currency Strategist at Commonwealth Bank of Australia (CBA).
The ABS said trimmed mean CPI, which the Reserve Bank of Australia closely watches, increased by 0.7% on the quarter, above the consensus estimate of 0.6%.
Headline CPI inflation rose by 0.9% q/q in Q1 2025 and the annual rate remained at 2.4%.
The AUD's appreciation confirms the markets see these numbers as arguing against the need for any accelerated pace to the RBA interest rate cutting cycle. However, they won't be enough to prevent the RBA from proceeding with a 25 basis point cut in May, something that is now fully priced by markets.
Economists say these inflation data confirm the RBA will want to approach interest rate cuts with caution, which should bestow an advantage on the Australian Dollar.
Currencies tend to be sensitive to changes in domestic interest rates relative to changes in the interest rates of other countries. The rule of thumb is that a slower pace of cuts relative to elsewhere would confer support.
"The case to normalise the cash rate to a more neutral setting remains, but we maintain that the Board will take a gradual approach in cutting rates despite CBA recently downgrading its forecast for the global economy," says Gareth Aird, an economist at CBA.
CBA thinks Australians can look forward to a pace of easing that is cautious, expecting one 25bp rate decrease each quarter in 2025.
Should other major central banks accelerate the pace of easing, then AUD can find support from the RBA's cautious quarterly pace. There is talk of the Bank of England accelerating its rate cutting pace to consecutive meetings, which could undermine the Pound.
For this reason, the Pound-to-Australian Dollar exchange rate could come under pressure into next week's Bank of England meeting.
However, AUD strength will ultimately be limited by ongoing concerns over a global tariff war, with new data from China showing a sharp slowdown in activity in April as tariffs start to bite.
China's official manufacturing PMI showed the sector slipped into a contraction this month at 49, marking a sharper than expected drop.
Australia is particularly prone to changes in Chinese data owing to strong trade links between the two countries, and the rule of thumb is that AUD underperforms when China does.
This is likely to be a bigger determinant of AUD exchange rate action in the near future than interest rate differentials and is why GBP/AUD should ultimately recover from any setbacks.