Hot CPI bolsters RBA rate hike bets as Australian Dollar trades above 0.7050

• With Fed interest rates unchanged, AUD/USD gains 0.40%.
• A rise in Australian trimmed mean CPI to 3.7% reinforces expectations of additional RBA tightening.
• Ahead of US PCE and GDP figures, the probability of a December Fed rate rise reaches 85%.

Following the Federal Reserve’s decision to leave interest rates unchanged, AUD/USD edges up 0.40% on Wednesday to trade at 0.7053. Fed Chair Kevin Warsh, meanwhile, signalled that “officials had made clear our readiness to act as circumstances require, and we have shown our willingness to act.”

AUD/USD advances as Australian inflation bolsters November tightening prospects despite hawkish Warsh remarks

Financial markets took the Fed’s decision and Warsh’s comments in their stride as the week’s main event concluded. A hold had been anticipated in money markets. During his press conference, Warsh reiterated the committee’s determination to bring inflation back to the Fed’s 2% target.

While describing policy tightening as effective, Warsh stopped short of characterising financial conditions as tight. He also ruled out a “soft inflation target”, stressing that the price stability objective is 2%, measured by Personal Consumption Expenditures (PCE).

In its earlier monetary policy statement, the Fed acknowledged robust economic activity and noted that labour market gains “have kept pace with the workforce”. Although inflation remained elevated, it would await further data before assessing the appropriate policy stance.

There were no other scheduled releases alongside the Fed decision. According to Prime Terminal, swaps markets had assigned an 85% probability to a 0.25% interest rate increase in December.

September’s Australian Trimmed Mean CPI increased by 3.7% year on year, compared with 3.5% previously, reinforcing the case for a further interest rate rise. Following the release, Reserve Bank of Australia (RBA) Deputy Governor Hauser warned that “inflation is too high.”

In a note, ANZ analysts forecast a November rate increase of 25 basis points and said they “expect to see upward revisions to the RBA’s inflation forecasts which will be published in the November SMP.”

US data dominate the forthcoming calendar

No releases are scheduled in Australia. By contrast, the US calendar includes the Fed’s preferred inflation gauge, Core PCE, alongside Gross Domestic Product (GDP) data and jobless claims.

AUD/USD Price Forecast: Technical picture in focus