Hot CPI and hawkish RBA fuel rate hike bets, nudging Australian Dollar higher

0.7035 is in sight as AUD/USD advances during Friday’s Asian session.
Rate hike expectations have strengthened following Australia’s above-forecast inflation and hawkish RBA comments.
A 3.75% to 4.00% target range remained in place after the Fed left rates unchanged at the close of its October meeting.

0.7035 is within reach as AUD/USD strengthens in Friday’s Asian trading. Higher-than-expected Australian CPI inflation has reinforced expectations of Reserve Bank of Australia (RBA) rate hikes, lifting the Australian Dollar (AUD) against the US Dollar (USD).

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

September’s Australian Consumer Price Index (CPI) inflation reached 4.3% YoY, up from 4.0% in August, according to Wednesday’s Australian Bureau of Statistics release. The reading exceeded the 4.2% market consensus. The price pressures that had concerned the RBA were beginning to materialise, RBA Governor Michele Bullock said.

The inflation release has strengthened the argument for an RBA rate hike at next Tuesday’s meeting, lending support to the Aussie. According to the ASX RBA Rate Tracker, markets now assign nearly an 80% probability to an increase in interest rates to 4.85% at the next RBA Board meeting. That compares with 62% before the release.

The US Federal Reserve (Fed) kept its benchmark federal funds rate within the 3.75% to 4% range on Wednesday. Governor Lisa Cook and Cleveland Fed President Beth Hammack voted against the decision, favouring a 25 basis point (bps) increase instead.

Incoming data would help shape their next decision, policymakers said. The CME FedWatch tool shows traders assigning a 74.9% chance to a December rate hike.

4.3% Australian inflation strengthens RBA hike expectations and lifts the Aussie

The Australian inflation release “beat expectations, strengthening the case for another RBA hike and underpinning AUD.” That is the assessment of strategists at Brown Brothers Harriman. They note that September headline CPI increased “4.3% y/y (consensus: 4.2%) vs. 4.0% in August reflecting rising housing and transport costs,” indicating that price pressures have exceeded the central bank’s expectations.

The RBA’s earlier projections now look too low, with BBH noting that “inflation is materially worse than the RBA assessed in August, when it forecast year-end headline CPI at 3.6% and trimmed mean at 3.3%.” The strategists conclude that “this argues for additional tightening,” while RBA cash rate futures have “raised odds of a 25bps hike to 4.85% on November 3 from 60% to 85%, and increased bets on another hike in Q1.”

Underlying price pressures also remain uncomfortably high for the RBA. BBH observes that “trimmed mean CPI matched consensus at 3.6% y/y up from 3.5% in August.” Of greater policy significance, the strategists add that “the policy-relevant Q3 trimmed mean CPI ran hot at 3.7% y/y (consensus: 3.6%) vs. 3.6% in Q2,” reinforcing that assessment of underlying inflation.

2% price stability pledge: Warsh reinforces resolve, sustaining Dollar bulls’ interest

A 7/10 FXS Speechtracker score, unchanged from the historical average, places Warsh’s press conference firmly within the established hawkish baseline. His statement that “ensuring price stability is not about a fixed date on a calendar” highlights an approach driven by data and outcomes. Repeated mentions of “new monetary medicine,” the withdrawal of accommodation and confidence in inflation expectations point to a continued focus on defeating inflation, rather than an advance commitment to a rapid policy pivot. Warsh also stressed a firm 2% PCE target and rejected a “soft” inflation objective. His acknowledgement that interest rates are tightening financial conditions and affecting new technology and CAPEX further reinforces a picture of sustained policy resolve, broadly supportive of the Dollar.

A +14.39-point rise took the FXS Fed Sentiment Index to 141.89, moving it further into hawkish territory in line with the unchanged 7/10 FXS Speechtracker score. The index remains well above its neutral 100 level. Alongside the firm 2% price stability commitment, recognition that “monetary medicine is starting to work” suggests markets should keep pricing a relatively restrictive Fed policy path. Such a backdrop typically supports the Dollar against the Euro and Yen.

Technical Analysis: 53.4 RSI supports AUD/USD’s modest near-term bullish bias

Trading above both the 100-day simple moving average (SMA) and the Bollinger middle band, AUD/USD retains a modest bullish bias on the daily chart. This positioning suggests underlying demand is supporting the recent recovery. At 53.4, the Relative Strength Index (RSI) has entered neutral-to-positive territory, indicating that buyers still have an advantage without the pair becoming overbought.

The upper Bollinger band, around 0.7065, presents the first resistance level. A sustained move above it would create scope for a longer recovery. Initial downside support lies at the 100-day SMA of 0.7035, ahead of the Bollinger middle band near 0.6995. Should the pullback extend to the lower Bollinger band at 0.6925, fresh buying interest would likely emerge, leaving the broader constructive outlook intact.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Australian Dollar: Key Questions Answered

Which factors matter most for the Australian Dollar?

Interest rates set by the Reserve Bank of Australia (RBA) are a major driver of the Australian Dollar (AUD). Australia’s abundant resources also make the price of Iron Ore, its largest export, particularly important. Other influences include the economic health of China, Australia’s biggest trading partner, alongside domestic inflation, growth and the Trade Balance. Investor appetite for risk matters too: a shift towards riskier assets, known as risk-on, supports AUD, whereas risk-off sentiment involves seeking safe-haven assets.

RBA decisions: How do they affect the Australian Dollar?

By setting the interest rate at which Australian banks lend to one another, the Reserve Bank of Australia (RBA) shapes borrowing costs across the economy and influences the Australian Dollar (AUD). It raises or lowers rates primarily to keep inflation stable at 2-3%. Rates that are relatively high compared with those of other major central banks support AUD; relatively low rates have the reverse effect. The RBA can also alter credit conditions through quantitative easing or tightening. Easing is negative for AUD, while tightening is positive.

China’s economy: Why does it matter for the Australian Dollar?

As Australia’s largest trading partner, China has a significant influence on the Australian Dollar (AUD). A strong Chinese economy buys more Australian raw materials, goods and services, increasing demand for AUD and lifting its value. When China’s growth falls short of expectations, the reverse occurs. Surprises in Chinese growth figures, whether positive or negative, therefore often feed directly into the Australian Dollar and its currency pairs.

Iron Ore prices: What is the link to the Australian Dollar?

According to 2021 data, Iron Ore generates $118 billion in annual exports for Australia, making it the country’s largest export, with China the main destination. Its price can therefore influence the Australian Dollar. Rising Iron Ore prices generally lift AUD by increasing aggregate demand for the currency, while falling prices tend to have the reverse effect. Higher Iron Ore prices also increase the likelihood of a positive Australian Trade Balance, providing another source of support for AUD.

Trade Balance: How does it influence the Australian Dollar?

Another influence on the Australian Dollar is the Trade Balance, the difference between export earnings and spending on imports. Strong overseas demand for Australian exports can lift the currency through the excess demand generated by foreign buyers relative to Australia’s import spending. A positive net Trade Balance therefore supports AUD, while a negative balance has the opposite effect.