Australian Dollar Hits 6-Week High

The Australian dollar rose above $0.70, hitting a six-week high and on track for a weekly advance as broad weakness in the US dollar outweighed fading expectations for further interest rate hikes at home. Markets imply next to no chance the Reserve Bank of Australia will hike at its August meeting and see only even odds of a move by December after softer-than-expected second-quarter inflation figures reduced the need for further policy tightening. Still, the RBA governor recently warned that another rate hike may still be needed to bring inflation back to target. Meanwhile, the greenback weakened broadly after June inflation data, released a day after the Federal Reserve left interest rates unchanged, came in softer than expected, prompting investors to further scale back expectations for additional Fed rate hikes. Suspected intervention by Japanese authorities to support the yen also weighed on the US dollar, providing additional support for the Aussie.

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.