Aussie Extends Rally on RBA Hike Bets

The Australian dollar rose toward $0.72, extending its rally to a fresh three-month high amid growing expectations of an interest rate hike as early as next month. The shift in rate expectations followed hotter-than-expected July inflation print, which showed price pressures remained elevated and prompted several major banks to revise their RBA forecasts. National Australia Bank now expects the central bank to raise its cash rate to 4.6% at the September 28-29 meeting, while Commonwealth Bank and ANZ see a hike in November, with both flagging a risk of an earlier move. Markets are pricing roughly a 50% chance of a September hike, sharply higher from 17% before the inflation report, while a November increase is now fully priced. The RBA kept its cash rate at 4.35% in August after three hikes earlier this year, but policymakers have warned they could tighten further if inflation risks build. Focus now turns to Q2 GDP next week and jobs data for further clues on the policy outlook.

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%.