Aussie Inflation Set to Cement RBA May Cut; Month-End Calm Prevails – Action Forex

The forex markets are generally holding steady today, with all major pairs and crosses bounded within yesterday’s range. While month-end lull is at play, caution is also dominating sentiment as traders prepare for a heavy barrage of economic data scheduled from Wednesday through Friday. Key reports include US GDP and non-farm payrolls, along with Eurozone GDP and CPI flash estimates.

Also, in the upcoming Asian session, Australia’s Q1 inflation report will be a major highlight. Focus will be on whether the closely watched trimmed mean CPI falls back within the RBA’s 2-3% target range for the first time since 2021. If realized, this would solidify expectations for a 25bps rate cut in May, a view that has become the base case for three of Australia’s big four banks.

Some speculation persists about the possibility of a larger 50bps cut by RBA, especially given mounting trade risks. But many analysts argue that such a move would risk sending an unnecessary panic signal to markets. Still, any deep downside surprise in tomorrow’s inflation data could quickly shift those odds.

Technically, EUR/AUD’s price actions from 1.8554 are seen as a triangle consolidation pattern. Break of 1.8014 resistance will argue that the pattern has completed, and larger rally from 1.5963 is ready to resume through 1.8554 high. However, firm break of 38.2% retracement of 1.5963 to 1.8854 at 1.7750 will dampen this view, and indicate that deeper correction is underway.

Overall for the week so far, Yen is staying as the strongest on, followed by Sterling, and then Swiss Franc. Kiwi is the worst, followed by Dollar, and then Loonie. Euro and Aussie are positioning in the middle.

In Europe, at the time of writing, FTSE is up 0.12%. DAX is up 0.56%. CAC is down -0.26%. UK 10-year yield is down -0.026 at 4.487. Germany 10-year yield is down -0.027 at 2.502. Earlier in Asia, Japan was on holiday. Hong Kong HSI rose 0.16%. China Shanghai SSE fell -0.05%. Singapore Strait Times fell -0.17%.

ECB consumer survey shows inflation expectations ticking higher

ECB’s Consumer Expectations Survey for March showed that consumers are raising their inflation views in a relatively measured manner rather than in a panic. Overall, the results present a slight inflationary concern on one side, but still subdued growth prospects on the other.

Median expectations for inflation over the next 12 months rose by 0.3% to 2.9%, the highest level since April 2024.

Looking further ahead, expectations for inflation three years out edged up by 0.1% to 2.5%, also hitting a one-year high.

Newly introduced five-year inflation expectations remained stable at 2.1%, suggesting longer-term expectations remain relatively anchored.

Uncertainty about the inflation outlook remained at its lowest level since January 2022.

On the broader economic front, the survey indicated that consumers’ income growth expectations stayed unchanged at a modest 1.0% over the next year, while expected nominal spending growth edged down to 3.4%.

Economic growth expectations remained weak, steady at -1.2% for the next 12 months.

ECB’s Cipollone warns trade fragmentation could severely hit global and Eurozone growth

ECB Executive Board member Piero Cipollone warned today that the recent surge in trade policy uncertainty poses a material risk to Eurozone growth. In a speech, he highlighted internal ECB research suggesting that rising uncertainty could trim Eurozone business investment by -1.1% in the first year, while real GDP growth could fall by about -0.2% in 2025-26.

Financial market volatility, elevated due to the global trade tensions, could further drag on growth. ECB staff estimate that the observed increase in volatility alone could shave an additional -0.2% off Eurozone GDP in 2025.

Cipollone emphasized that over the medium term, tariffs will have an “unambiguously recessionary effect” across both economies imposing and receiving restrictions, and noted that the ability of exchange rates to “absorb tariff shocks” appears to have diminished.

ECB’s analysis of fragmentation scenarios paints an even bleaker picture. In a mild East-West decoupling, global output could drop by nearly -2%. In a severe decoupling where trade between blocs halts entirely, global output could plunge by up to -9%.

Trade-dependent economies would bear the heaviest losses, with the EU facing a GDP decline of between -2.4% and -9.5% depending on the severity. Notably, the US itself could suffer a near -11% contraction in the most extreme case if it “imposed additional trade restrictions against western and neutral economies”.

While the growth impact of trade fragmentation is clear, the inflationary effects remain less certain. For the Eurozone, recessionary forces, stronger real interest rates, and Euro appreciation could generate a “disinflationary: trend in the near to medium term.

German Gfk consumer sentiment rises to -20.6, domestic political stability offsets trade concerns

Germany’s GfK Consumer Sentiment Index for May rose from -24.3 to -20.6 and outperforming expectations for a decline to -26.0.

In April, key underlying indicators also showed encouraging signs. Income expectations rose sharply for a second straight month, climbing 7.4 points to 4.3, their highest level since October 2024. Economic expectations increased modestly for a third consecutive month. Willingness to save fell, while willingness to buy improved slightly.

Rolf Bürkl, consumer expert at NIM, noted that US President Donald Trump’s aggressive tariff announcements in early April have “not yet had lasting impacts on consumer sentiment” in Germany.

Instead, German consumers appear more reassured by the domestic political backdrop, particularly the successful conclusion of coalition negotiations and the imminent formation of a new government. The easing of political uncertainty has helped mitigate potential negative effects from external trade tensions.

RBA’s Kent highlights surge in FX volatility, stresses importance of market standards

In a speech today, RBA Assistant Governor Christopher Kent noted that early April saw some of the most extreme movements outside of the global financial crisis. He highlighted that Australian Dollar fluctuated within a range of 4 US cents and at one point suffered a 4.5% daily decline against the greenback — an unusually large move.

Kent also pointed out that broader measures of FX volatility, such as those derived from options markets, spiked to levels last seen during the pandemic, with liquidity conditions deteriorating noticeably.

While market conditions have calmed somewhat in recent days, Kent emphasized that such episodes serve as a reminder of the crucial role played by the Foreign Exchange Global Code.

He stressed that in periods of heightened uncertainty, the Code’s standardized practices and commitment to transparency help maintain trust between participants and ensure smoother market functioning even amid significant economic shocks.

USD/CHF Mid-Day Outlook

Daily Pivots: (S1) 0.8159; (P) 0.8239; (R1) 0.8280; More….

No change in USD/CHF’s outlook and intraday bias remains neutral. On the upside, above 0.8333 will resume the rebound from 0.8038 short term bottom. But upside should be limited by 38.2% retracement of 0.9200 to 0.8038 at 0.8482. On the downside, below 0.8196 minor support will bring retest of 0.8038. Firm break there will resume larger down trend.

In the bigger picture, long term down trend from 1.0342 (2017 high) is still in progress and met 61.8% projection of 1.0146 (2022 high) to 0.8332 from 0.9200 at 0.8079 already. In any case, outlook will stay bearish as long as 55 W EMA (now at 0.8783) holds. Sustained break of 0.8079 will target 100% projection at 0.7382.