Australia’s Consumer Price Index (CPI) for the second quarter of 2025 increased by 2.1% compared to last year. This is a bit lower than the expected 2.2%. However, the trimmed mean CPI rose by 2.7% as expected. These figures could lead to a 25 basis point cut in the cash rate by the Reserve Bank of Australia (RBA) in August. Consumer prices have grown at the slowest rate in over four years, with core inflation hitting a three-year low. Following this inflation data, the Australian dollar has weakened. The Reserve Bank of Australia will meet on August 11 and 12.

Upcoming RBA Rate Decision

Given the soft inflation numbers for Q2 2025, a rate cut by the RBA next month seems almost certain. The market is pricing in over a 90% chance of a 25 basis point cut at the August 12th meeting, which opens up clear opportunities in the coming weeks. Traders should prepare for falling interest rates by opting for fixed rates in the swaps market. This outlook is backed by recent data, including weak retail sales figures from June 2025, indicating less consumer activity. It’s best to take these positions before the RBA meeting. We also expect Australian government bond futures to rise, especially the 3-year contracts which are most responsive to cash rate changes. Bond prices typically go up as yields drop in anticipation of central bank easing. Looking back to 2019, we saw the market respond ahead of the RBA’s actions, and we anticipate a similar trend now.

Impact on Currency and Stocks

The Australian dollar is likely to weaken further against the US dollar, especially since the Federal Reserve is expected to keep rates steady. This difference in policies makes buying AUD/USD put options an attractive way to profit from or protect against a declining currency. A drop below this year’s lows appears more likely. For the stock market, these factors favor the ASX 200 index. Lower borrowing costs will help rate-sensitive sectors like real estate and banking. We expect increased buying in ASX 200 futures as investors prepare for a more supportive monetary policy. This perspective is further supported by the latest jobs report for June 2025, which showed the unemployment rate rising to 4.2%. This gives the RBA strong reasons to cut rates, addressing inadequate inflation and a weakening labor market. Governor Bullock has already indicated a cautious, data-driven approach in recent speeches. Create your live VT Markets account and start trading now.

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