Australian Dollar Rises on RBA Decision

The Australian dollar fell to around $0.71, hitting a six-week low as weak household demand reinforced expectations that policy tightening is nearing its end. Data showed household spending fell a sharper-than-expected 1.1% in April as consumers cut back on travel, clothing, and food, with higher fuel costs and geopolitical uncertainty weighing on confidence. The decline added to signs that restrictive monetary policy is cooling demand, even as business investment surged 6.5% in Q1, driven largely by imported data equipment. Markets now widely expect the Reserve Bank to hold rates at 4.35% in June, while the odds of an August hike has more than halved to 40%. Earlier inflation data also supported the shift in sentiment, with headline CPI easing to 0.4% in April and annual inflation slowing to 4.2%, helped partly by fuel tax relief. However, underlying inflation remained elevated at 3.4%, still above the RBA’s target range, reflecting ongoing spillovers from higher global energy costs.

The Australian dollar weakened to around $0.71, hitting a one-week low as softer-than-expected inflation data reduced expectations of further rate hikes. Data from the Australian Bureau of Statistics showed April's monthly CPI eased to 0.4% from a seven-month high of 1.1%, while the annual rate slowed to 4.2% from 4.6%, below forecasts of 4.4%, partly reflecting a government fuel tax cut. However, underlying inflation remained sticky, with the trimmed-mean measure of core inflation rising 0.3% on the month, in line with estimates, and 3.4% year-on-year, marking the highest since late 2024 and further above the Reserve Bank’s 2–3% target band, as higher oil prices linked in the Middle East conflict fed through the broader economy. Still, markets scaled back tightening expectations, with swaps now pricing a 96% chance of the central bank holding the cash rate at 4.35% in June, up from 84% before the data. Pricing for an August rate hike was also reduced to 24% from 45% previously.

The Australian dollar edged lower around $0.71, but stayed near a one-week high as renewed US strikes on Iran dampened hopes for a peace deal, while investors awaited key domestic inflation figures. April CPI data due Wednesday is expected to show consumer prices rising 0.6% month-on-month, with annual inflation easing slightly to 4.4% from 4.6%, largely due to a government fuel tax break. However, the Reserve Bank's preferred trimmed mean measure is forecast to accelerate to 3.4% annually from 3.3%, reflecting rising transport and logistics costs across a broad range of industries. A stronger inflation reading could strengthen the case for further policy tightening, although markets currently assign only a 10%-12% chance to a 25-bp rate hike in June, while the odds of an August increase stand near 50%. Elsewhere, oil prices advanced after reports of fresh military strikes in Iran clouded prospects for an interim agreement between Tehran and Washington to reopen the Strait of Hormuz.