Australian Dollar retreats despite warnings of RBA rate hikes

• Persistent inflation could require further interest rate rises, RBA Assistant Governor Sarah Hunter warned.
• A 90.6% probability of unchanged Fed rates in October is priced into markets, according to the CME FedWatch Tool.
• Developments in the Middle East remain on traders’ radar, from US-Iran tensions to Houthi attacks in Saudi Arabia.

At around 0.7030 in Monday’s Asian session, AUD/USD is edging lower after recording a modest advance on the previous trading day. Further losses could be limited, however, as warnings from Reserve Bank of Australia (RBA) Assistant Governor Sarah Hunter may lend support to the Australian Dollar (AUD).

Stubborn inflation and the possibility that overseas price pressures could become embedded in the economy may require additional interest rate increases, Hunter warned on Sunday. Following four rate rises earlier this year, her comments strengthened expectations that monetary policy would remain restrictive.

With August CPI still above the RBA’s 2% to 3% target range, attention is turning to the September inflation figures due later this week. Any fresh escalation in the US-Iran conflict that pushes crude oil prices higher would also intensify the RBA’s concerns about second-round inflation effects, raising the prospect of further monetary tightening beyond November.

RBA credibility comes under pressure as inflation expectations move above target

Survey findings point to a concerning change in domestic attitudes towards inflation, according to Commerzbank’s Norman Liebke, who notes that “a growing share of businesses believe that inflation of 3-3.5% is ‘the new normal’.” Against the “long-term inflation target of 2-3%,” he considers this a problem for the RBA’s inflation-targeting framework. He also stresses that the risk extends beyond theory: “trimmed-mean inflation most recently stood at 3.6%, further above the target range.” As markets increasingly factor in additional RBA tightening, Liebke sees high core inflation and shifting expectations as compounding the difficulties facing policymakers.

The Federal Reserve’s forthcoming policy decision is also drawing traders’ attention. Expectations broadly favour unchanged interest rates, with another increase potentially following in December. The CME FedWatch Tool puts the market-implied probability of a pause at the October 27–28 policy meeting at 90.6%, while the chance of a December rise stands at 79.7%.

Geopolitical developments across the Middle East remain another focus for market participants. According to Al Jazeera, US President Donald Trump dismissed the prospect of immediate military action against Iran, saying, “there will not be a strike today,” after previously suggesting that Washington might have to “finish the job” or possibly secure an agreement with Tehran. Those earlier comments came amid mounting Iranian and Houthi threats to American interests in the region.

Regional tensions were heightened further on Sunday when Yemen’s Houthis said they would keep targeting Saudi Arabia’s King Khalid Airport in Riyadh, Reuters reported. Only hours earlier, Saudi officials had said flights at the airport had resumed despite the group’s repeated attacks.