This week our currency strategists focused on Australia’s January 2025 CPI Report and its potential impact on the Australian dollar for potential high-quality setups
Out of the four scenario/price outlook discussions this week, one discussion arguably saw both fundie & technical arguments triggered to become potential candidates for a trade & risk management overlay.
Watchlists are price outlook & strategy discussions supported by both fundamental & technical analysis, a crucial step towards creating a high quality discretionary trade idea before working on a risk & trade management plan.
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AUD/JPY: Tuesday – February 25, 2025
AUD/JPY 1-Hour Forex Chart by TradingView
On Tuesday, our strategists had their sights set on Australia’s January CPI Report and its potential impact on the Australian dollar. Based on our Event Guide, expectations were for inflation to come in at 2.6% y/y (compared to 2.5% previous), with recent business surveys flagging rising input costs in manufacturing and services that pointed to lingering price pressures. With those expectations in mind, here’s what we were thinking:
The “Aussie Advance” Scenario:
If inflation beat expectations (above 2.6%), we anticipated this could boost the Aussie dollar, particularly against currencies with dovish central banks. We focused on AUD/CHF for potential long strategies in a risk-on environment, especially given the Swiss franc’s safe-haven tendencies and SNB’s clear easing plans with Swiss inflation well under control.
If risk sentiment leaned negative, EUR/AUD shorts looked promising given the Euro Area’s triple threat of economic weakness, tariff vulnerability, and geopolitical exposure that positions the ECB firmly on a dovish path.
The “Aussie Avalanche” Scenario:
If Australia’s inflation data disappointed (below 2.5%), we thought this could weaken AUD. We eyed AUD/JPY for potential short strategies if risk sentiment turned negative, particularly given the BOJ’s relatively hawkish stance and safe-haven flows supporting the yen amid ongoing geopolitical tensions.
In a risk-on environment, GBP/AUD longs made sense given stronger UK economic data that had thrown cold water on future BOE rate cut speculations, despite their “dovish split” in their latest decision.
What Actually Happened:
Australia’s inflation rate for January 2025 came in at 2.5% y/y, matching December’s reading but falling slightly below the expected 2.6%. While the headline figure held steady, the trimmed mean measure of core inflation ticked up slightly to a concerning 2.8% in January from 2.7% in December, suggesting persistent underlying price pressures despite remaining within the RBA’s target band.
Key points from the CPI report:
- Food prices rose 3.3% compared to last year
- Housing costs increased 2.1%
- Alcohol and tobacco jumped significantly by 6.4%
- Electricity prices fell considerably (-11.5%) thanks to government rebates
- Fruit and vegetable prices increased 7.0%
- Gasoline prices dropped 1.9% over the year
Market Reaction:
With the data apparently not doing enough to fight off rate cut speculators, we thought that his outcome fundamentally triggered our AUD bearish scenarios. And with risk sentiment leaning negative due to Trump’s tariff threats and weaker U.S. data, AUD/JPY became our focus.
Looking at the AUD/JPY chart, we can see that the pair had been consolidating in a rectangular pattern just under the Pivot Point (95.429) before the data release. When Australia’s CPI data hit the wires, AUD/JPY immediately began trending lower, breaking below this consolidation area.
The selling momentum accelerated through the following trading sessions as broader risk-off sentiment took hold. Trump’s confirmation of tariffs on Canada and Mexico for March 4 (instead of April 2 as hinted earlier) and doubling existing tariffs on China sent shockwaves through markets, fueling safe-haven demand for the yen.
BOJ Governor Ueda’s comments that “very strong uncertainty” on U.S. policies warranted a closer look from the central bank added to JPY strength. Meanwhile, Australia’s weaker-than-expected private capital expenditure data (-0.2% q/q vs 0.6% forecast) released later in the week likely brought some fundamental weight on the Aussie.
AUD/JPY eventually broke through the S1 support level (94.049) and continued its descent toward the S2 pivot point (93.247), bottoming near 93.000 before a slight recovery into the weekend. By Friday’s close, the pair was trading around 93.380, down nearly 2.94% from our discussion price.
The Verdict:
So, how’d we do? Our fundamental analysis correctly anticipated potential AUD weakness if inflation data disappointed, which in this case was mixed and arguably not enough to deter rate cut speculation. Our technical analysis also accurately identified the key pivot point levels that would likely serve an area to watch once the bearish move gained momentum.
We think this discussion was “highly likely” supportive of a net positive outcome as both fundamental and technical triggers aligned well. The combination of slightly softer Australian inflation and subsequent weak capital expenditure data, coupled with BOJ Governor Ueda’s hawkish lean and Trump’s tariff announcements, created a perfect storm for AUD/JPY fundamental bears.
If traders entered short positions after the CPI release around the 95.409 pivot point level and targeted S1 (94.049) and then S2 (93.247), they could have captured a substantial move of over 200 pips. Even those who waited for confirmation of the breakout below the consolidation area would have seen their positions run favorably as risk-off flows dominated the market narrative throughout the week.
This setup demonstrates the power of combining fundamental catalysts with technical analysis, especially when they align with broader market themes like trade tensions and diverging central bank outlooks. The rapid descent of AUD/JPY shows how quickly market dynamics can shift when multiple bearish factors converge.
