Surprise reaction to inflation data as interest rate cuts look unlikely

In short

1. Strong inflation data released in Australia yesterday
2. Markets now pricing almost no chance of an interest rate cut in February
3. Inflation could increase as a result of the Australian bushfires

Yesterday, inflation figures released to the market failed to move the Australian dollar exchange rate.

The figures implied that inflation has stopped falling. Despite this, it still remains below the RBA's target of 2-3%.

Why inflation figures can have an impact on the Aussie dollar

One of the biggest influences of the Australian dollar is the official interest rate which is set by the RBA.

Any change in expectations of future interest rate movements can impact interest rate markets but also currency exchange rates.

For instance, if inflation is rising and there is a greater chance of interest rate hikes from the RBA, the Australian Dollar might move higher in response. On the other hand, if inflation is falling and interest rates look more likely to fall, the value of the Australian Dollar could also fall.