AUD/JPY breaks below 97.00, downside risks appear due to softer Australian Inflation

• AUD/JPY depreciates as softer Australian CPI data has strengthened the case for a potential RBA rate cut in February.
• Australia's Monthly CPI for December 2024 increased by 2.5% YoY, remaining within the RBA target range of 2-3%.
• The Japanese Yen rises amid the increased likelihood of the BoJ's hawkish policy outlook.

AUD/JPY depreciates as the Australian Dollar (AUD) falls against its peers following the release of softer Consumer Price Index (CPI) data from Australia on Wednesday. The currency cross trades around 96.90 during the Asian hours on Wednesday.

Australia's CPI inflation eased to 2.4% year-over-year in Q4 from 2.8% in Q3, also below the consensus forecast of 2.5%. Monthly CPI for December 2024 increased by 2.5% year-over-year, in line with forecasts and up from November's 2.3%. This marked the highest reading since August but remained within the Reserve Bank of Australia's (RBA) target range of 2% to 3% for the fourth consecutive month.

The easing inflationary pressures at the end of 2024 have strengthened the case for a potential interest rate cut by the RBA in February. The central bank has held the Official Cash Rate (OCR) steady at 4.35% since November 2023, emphasizing that inflation must "sustainably" return to its 2%-3% target range before any rate cut can be considered.

Australian Treasurer Jim Chalmers stated that "the worst of the inflation challenge is well and truly behind us." Chalmers further emphasized that "the soft landing we have been planning and preparing for is looking more and more likely," according to Reuters.

Moreover, the Japanese Yen (JPY) strengthens amid increasing expectations that the Bank of Japan (BoJ) will continue raising interest rates. Minutes of the December Bank of Japan meeting released this Wednesday showed that members emphasized the need for cautious monetary policy adjustments.

Meanwhile, investors are more confident that the BoJ will continue its move toward normalization and deliver additional interest rate hikes in 2025. Last week, the BoJ reaffirmed its commitment to further rate hikes and adjustments to its monetary policy stance if the outlook presented at the January meeting unfolds as expected.