Robust inflation figures on Wednesday reduced the chances of the Reserve Bank of Australia (RBA) opting to cut the cost of borrowing in February.

The Consumer Price Index (CPI) rose by a higher-than-expected 0.7% in the final three months of 2019, while annual inflation increased by 1.8% – it’s highest reading since the fourth quarter of 2018. However, core inflation failed to advance, remaining below target at 1.6% despite three interest rate cuts from the RBA. This has led analysts to believe the central bank might need to take further action to revive consumer prices.

persistent below trend Australian growth

Prior to this came news that the Leading Index – which tracks nine gauges of economic activity – improved slightly in December. However, the index remained below zero for the thirteenth straight month, indicating persistent below-trend growth in the Australian economy.

Potential gains for the Australian dollar (AUD) were subdued, however, by concerns that the ongoing spread of the Coronavirus in China could hurt global economic growth. Any detrimental impact on Chinese demand for base metals like iron ore and copper could cause the commodity-correlated AUD to drop in value. This was compounded by a surge in demand for safe-haven currencies, as a risk-off mood ensued.

Looking ahead

After more than three and a half years of delay and uncertainty, short-term Brexit related optimism could cause the AUD to lose ground on the GBP. However, this is uncharted territory for the GBP, making it difficult to predict exactly what will happen once it steps into the unknown. One thing is certain: the tight trade deal deadline has put a no-deal scenario firmly back on the table. The resulting uncertainty could support the AUD against the GBP in the longer term.

Monday’s TD Securities Inflation figure will be closely monitored by the RBA, which announces its latest interest rate decision the following day. The central bank is expected to hold rates steady at its latest meeting of policymakers.

A busy day on Thursday sees the release of Imports, Exports, Trade Balance and Retail Sales figures. Plus, the National Australia Bank's Business Confidence report.

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