The Australian Dollar weakened after Australia’s January inflation data came in below expectations.

The Monthly Consumer Price Index Indicator showed a 2.5% year-on-year increase, lower than the anticipated 2.6%, which contributed to the currency’s broad decline for the day.

The AUD/USD exchange rate continued its retreat from Friday's peak of 0.64, falling to 0.6330.

“AUD/USD eased modestly further after the weaker than expected Australian CPI for January,” said Head of International Economics at Commonwealth Bank of Australia, Joseph Capurso.

In addition, the Pound-to-Australian Dollar exchange rate (GBP/AUD) climbed to a peak of 2.0 after domestic inflation in Australia hit 2.5% for the 12 months leading up to January, Pound Sterling Live reports.

According to the Australian Bureau of Statistics (ABS), the undershoot in inflation was attributed to softer housing inflation, some weakness in volatile items, and the annual reweighting of the CPI.

The trimmed mean measure of core inflation, which is closely watched by the Reserve Bank of Australia (RBA) for policymaking, rose to 2.8% per year, as anticipated.

The RBA lowered interest rates on 18^th February but indicated that inflation pressures remained too high to fully commit to additional rate cuts.

The messaging from the central bank indicates that it would prefer to see a more significant and sustained drop in inflation before considering a shift in policy to implement a series of rate cuts.

Economists at the Commonwealth Bank of Australia reviewed the data and believe the current trend could allow the central bank to cut rates again in May, earlier than the market consensus anticipates.

Economists at Standard Chartered disagree, forecasting only one more 25 basis point rate cut in Q3, rather than the two cuts in Q3 and an additional cut in Q2 that were previously expected before the mid-February RBA decision.

They now project the RBA's cash rate to reach 3.85% by the end of the year, up from their previous estimate of 3.35%.

The timing of the rate cut, whether in Q3 or Q2, will be crucial for the Aussie Dollar's outlook. An earlier cut could signal the possibility of more cuts in 2025, which would put downward pressure on the currency.

Conversely, a later cut would suggest a more gradual approach, likely providing support for the Aussie Dollar, the report goes on to add.