The Australian Dollar may have been stronger on Wednesday if not for weak domestic data.

A favourable global environment coincided with positive news for Australians, as May’s monthly inflation report came in lower than expected.

Headline inflation declined from 2.4% year-on-year to 2.1%, beating the forecast drop to 2.3%. Meanwhile, the Australian Bureau of Statistics reported that trimmed mean inflation, a key measure for the Reserve Bank of Australia (RBA), fell from 2.8% to 2.4%.

Services inflation dropped from 4.1% to 3.3%, reversing its recent upward trend. The decline suggests that the persistent component of headline inflation is starting to ease.

While this is welcome news for everyday Australians, it’s less favourable for those hoping for a stronger Australian Dollar, Pound Sterling Live reports.

The monthly inflation data points to a likely weaker quarterly reading ahead, which could give the RBA greater confidence to proceed with further interest rate cuts.

Expectations of lower interest rates in the future are currently putting downward pressure on the Australian Dollar.

“There is little reason for the RBA to not lower rates further in July. A cash rate at 3.60% would still be modestly restrictive, and the labour market appears to be softening a little,” stated David Forrester, FX Strategist at Crédit Agricole.

The Pound to Australian Dollar exchange rate illustrates this dynamic, slipping just 0.10% to 2.0958 on the day, a relatively modest move, especially considering the boost in global investor sentiment following the Iran-Israel ceasefire.

Similarly, the Euro is down 0.15% against the Aussie at 1.7861. Meanwhile, the Australian Dollar has gained ground versus the US Dollar, trading up on the day at 0.6497.

“For AUD/USD, the soft inflation data will keep it locked in its 0.6350-0.6550 range. While the Australian rates market was already aggressively priced for further rate cuts meaning soft inflation will not be much of a drag on the exchange rate, AUD/USD likely needed strong inflation data to push it out of the top of its range,” Forrester added.

The Australian Dollar has rebounded over the past 24 hours, supported by the ceasefire between Israel and Iran, which reduces the likelihood of severe global economic disruptions.

The rebound in global equity markets reflects improved investor sentiment, which typically benefits the Aussie. However, the momentum is being limited by soft domestic economic data, which continues to weigh on the currency’s recovery potential.