Aussie Hits 3-Month Top on Hot CPI Data

The Australian dollar rose toward $0.72, hitting a twelve-week high as hotter-than-expected July inflation data fueled the risk of another hike in interest rates. The monthly CPI rose 1.0% in July from June, above forecasts for a 0.8% increase, while annual inflation eased to 3.5% from 3.8%, but remained above expectations of 3.3%. Meanwhile, the trimmed mean measure of core inflation increased 0.5% in the month, above forecasts of 0.3%, leaving annual underlying inflation at 3.6%. The stronger-than-expected figures come amid repeated warnings from the Reserve Bank that inflation remains too high and that risks remain pointed upwards. The RBA has already raised interest rates three times this year in an effort to get inflation back to target, and Governor Michele Bullock said after the latest meeting that another increase was “quite possible.” Markets now raised the probability of a rate hike next month to 27% from 17%, while a move by February next year is now priced at 80%.

The Australian dollar held above $0.71, trading near an eleven-week high as markets weighed the RBA’s August meeting minutes. While the Board judged the current cash rate was sufficiently restrictive to bring inflation back to target within a reasonable timeframe, several members saw a meaningful risk that inflation could prove more persistent than expected. The RBA held rates at 4.35% for a second straight meeting two weeks ago after three hikes earlier this year, but policymakers warned of further tightening if inflation risks materialize. Still, weak jobs data has reduced expectations for an immediate hike, with markets pricing only a 13% chance of a September increase, while seeing around a 67% probability of a hike by February 2027. Upcoming monthly inflation data on Wednesday will therefore be crucial for the policy outlook. Headline inflation is expected to ease to 3.2% from 3.8% despite a 0.8% monthly rise, while the trimmed mean is forecast to edge down to 3.5% from 3.6%.

The Australian dollar held above $0.71, staying near a twelve-week high as broad weakness in the US dollar continued to support the currency. The Aussie finished up 1.2% last week, marking its longest weekly winning streak since 2020, as the greenback came under pressure from concerns over US fiscal policy and the effectiveness of Treasury debt buybacks. Meanwhile, markets are awaiting Australia’s July inflation data due Wednesday for clues on the RBA's next move. The central bank kept its cash rate at 4.35% this month, although Deputy Governor Hauser said further hikes remain possible if inflation risks from the Middle East conflict, AI investment and weak productivity materialize. A weaker labor market has tempered bets for further tightening, but markets still price in roughly 60% odds of a year-end hike, while a February move is about 68% priced in. Elsewhere, investors continued to monitor tensions in the Middle East, with the US expected to announce new sanctions against Iran.