Aussie Dollar Dips on Softer CPI Data

The Australian dollar fell below $0.695, reaching its weakest level in two weeks as softer inflation data dampened expectations of additional interest rate hikes. Headline inflation unexpectedly eased to a four-month low of 3.8% in June from both May's reading and forecasts of 4.0%, while monthly consumer prices unexpectedly fell 0.1% for a second straight month. Meanwhile, the closely watched trimmed mean inflation rate rose 3.6% annually, below expectations of 3.7%, while quarterly core inflation increased 0.8%, also undershooting forecasts. Although inflation remains above the Reserve Bank’s 2%–3% target range, markets sharply scaled back bets on another rate hike this year to around 50% from more than 90% before the release. The softer readings also reinforced the view that the central bank is unlikely to resume policy tightening at its August 11 meeting. Still, the RBA's governor recently warned that another rate hike may still be needed to bring inflation back to target.

The Australian dollar depreciated to below $0.698, easing from multi-week highs as investors reassessed the monetary policy outlook after fresh comments from the central bank's governor. Reserve Bank of Australia Governor Michele Bullock said another interest rate hike may still be needed to bring inflation back to target, but stressed that the near-term outlook remains highly uncertain. She noted that further moderation in domestic demand and labor market conditions would likely be needed before policymakers can judge whether previous tightening has been sufficient. Her comments led markets to trim the probability of an August rate hike to around 20% from about 30%, though investors continue to expect the cash rate to reach 4.60% by year-end. Focus now turns to Wednesday's second-quarter CPI report, with core inflation expected to accelerate to 3.7%, remaining above the RBA's 2%–3% target range. Meanwhile, a pause in US-Iran hostilities provided support for the risk-sensitive Aussie.

The Australian dollar held around $0.70, staying near multi-week highs as investors await upcoming inflation figures this week for clues on the Reserve Bank’s policy outlook. The second-quarter CPI report, due on Wednesday, is expected to show core inflation rose 0.9% in the quarter, lifting the annual rate to 3.7% from 3.5%. The anticipated reading would remain well above the RBA's 2%–3% target range, reinforcing bets that policymakers will maintain a tightening bias. Markets currently imply a 30% chance the RBA will lift the 4.35% cash rate in August, with a move by November almost fully priced. Meanwhile, a pause in the US-Iran conflict supported risk appetite. Oil prices retreated, while the US dollar weakened after Washington suspended its nearly two-week campaign of strikes against Iran, while Tehran said it had ended its retaliatory attacks. Elsewhere, focus is on the upcoming monetary policy meeting by the US Federal Reserve, where rates are expected to be left on hold.