Aussie Dollar Gains as RBA Flags Hotter Inflation

The Australian dollar held below $0.68, staying at its lowest level since late January as the US dollar strengthened on growing expectations of a Federal Reserve interest rate hike. The odds of a half-percentage-point Fed rate hike in December surged after US inflation accelerated more than expected in October and policymakers signaled willingness to tighten policy more aggressively. In contrast, weak housing data and a significant drop in both consumer and business confidence in Australia prompted traders to largely rule out a further interest rate increase by the Reserve Bank of Australia in December. After the central bank had increased interest rates five times this year, which brought the cash rate to an eighteen-year high of 4.85%, markets now imply an 82% probability that rates have peaked, with a quarter-point rate cut fully priced in by the end of 2027. Meanwhile, a broader selloff in global equity markets added pressure to the risk-sensitive Aussie.

The Australian dollar held below $0.69, after reaching its lowest level since late January as weak domestic economic surveys and a stronger US dollar weighed on the currency. Consumer sentiment fell to a four-year low in November, while business conditions remained stuck in negative territory, a level not seen in six years, reflecting growing caution over the domestic economic outlook. The readings reinforced expectations that the Reserve Bank of Australia has finished its tightening cycle following five interest rate increases this year, which brought the cash rate to an eighteen-year high of 4.85%. Markets now imply an 82% probability that rates have peaked, with a quarter-point rate cut fully priced in by the end of 2027. In contrast, hotter-than-expected US inflation data and a series of hawkish remarks from Federal Reserve officials expressing concern over stubborn inflation ramped up bets on a large 50-bp rate hike in December, lifting the US dollar to a near one-month high.

The Australian dollar held above $0.69 after rising nearly 1% the previous day to recover from a recent seven-month low, as investors rotated back toward risk-sensitive currencies amid a softer US dollar and improving global risk appetite. A rebound in global equities and easing concerns over renewed US-Iran tensions helped lift demand for riskier assets, while lower oil prices further improved the broader market outlook. However, domestic headwinds continue to weigh on the currency, with Westpac's consumer sentiment index falling 2.7% to 78.2 in November, its lowest level in four years. Business mood also fell to a six-year low. The cautious outlook is compounded by a less-hawkish Reserve Bank of Australia, which raised interest rates for a fifth time this year last week in a split 6–3 decision but dropped its tightening bias. Interest rate swaps currently imply an 80% probability that rates have peaked, with around 30 basis points of easing priced in by the end of next year.