Aussie Dollar Steady Ahead of CPI Data

The Australian dollar held below $0.705, near ten-week lows and headed for a modest weekly loss as a stronger US dollar and fading bets of additional RBA rate hikes weighed on the currency. Markets increasingly suspect the Reserve Bank of Australia has finished tightening after keeping the cash rate unchanged this week, with the odds of one more hike this year reduced to about 50%. While Governor Michele Bullock maintained that further tightening remains possible if inflation persists, markets expect it would take a sharply higher second-quarter inflation reading to trigger another move. Meanwhile, the US dollar index climbed to a one-year high after the Fed Reserve's hawkish hold prompted traders to increase bets on further rate hikes. Nearly half of policymakers projected at least one increase this year amid growing inflation concerns. Elsewhere, a US-Iran interim deal and the resumption of energy flows through the Strait of Hormuz provided some support for the risk sensitive AUD.

The Australian dollar rose above $0.70, but remained near two-month lows as the US dollar jumped following the Federal Reserve’s interest rate decision. While the Fed left its policy rate unchanged, half of FOMC members expect a hike later this year amid growing inflation concerns. Meanwhile, new Fed Chair Kevin Warsh shifted away from forward guidance in his debut communication, emphasizing a more inflation-focused policy stance. In Australia, the Reserve Bank signaled further tightening after holding rates steady. Governor Michele Bullock emphasized that inflation remains too high and reiterated that further rate hikes cannot be ruled out. While markets increasingly suspect that the tightening cycle is over, the RBA’s hawkish tone has kept a roughly 50% odds of one final hike this year priced in. Elsewhere, US President Trump signed an interim agreement to end the war with Iran, although it remains uncertain whether Iran has already begun steps to fully reopen the Strait of Hormuz.

The Australian dollar held above $0.70, sustaining its rebound from a recent two-month low as the Reserve Bank signaled further tightening to restrain inflation. After the central bank left the cash rate unchanged at 4.35% at its June meeting, Governor Michele Bullock said the board remains alert to upside inflation risks, stressing that demand still needs to moderate further. Although the RBA opted to pause in order to assess the full impact of three rate hikes earlier this year, she reiterated that further rate increases cannot be ruled out. While markets increasingly suspect that the tightening cycle is over, the RBA’s hawkish tone has kept a roughly 50% chance of one final hike this year priced in, but the odds of an August move stands at just 25%. The upcoming May CPI report due next week will be pivotal for the outlook. Meanwhile, improving risk sentiment from progress toward a US-Iran peace deal also supported the Aussie, easing concerns over energy-driven inflation pressures.