Australian Dollar stays near one-month highs as focus turns to CPI and Fed

• Hawkish RBA expectations lift AUD/USD modestly, even as the US Dollar firms.
• Wednesday’s Australian inflation release could bolster expectations for a further RBA rate increase.
• RBA Governor Bullock’s testimony and the Fed’s interest rate announcement are also in focus for traders.

Trading at around 0.7027 at the time of writing, AUD/USD is close to one-month highs as it makes modest gains on Tuesday. Expectations of a hawkish Reserve Bank of Australia (RBA) are helping the Australian Dollar (AUD) outpace its major counterparts. Easing worries about heavy AI expenditure have also brought a recovery in equity markets, lending support to the risk-sensitive Aussie. However, renewed US Dollar (USD) strength is restraining gains in the pair.

Wednesday brings Australia’s inflation release alongside parliamentary testimony from RBA Governor Michele Bullock, giving traders two potential influences on expectations for the RBA’s November interest rate decision. Later the same day, the Federal Reserve’s (Fed) monetary policy announcement presents a further important test for AUD/USD.

A September increase of 0.7% is expected in Australia’s headline Consumer Price Index (CPI), compared with 0.4% in August. That would lift annual inflation from 4.0% to 4.2%. For the third quarter, inflation is projected to pick up to 1.3%, against 0.6% in the second quarter.

For evidence of underlying price pressures, traders will scrutinise trimmed mean inflation as well. Forecasts point to a monthly rise of 0.3% in September, following August’s 0.2% increase.

According to Elias Haddad of Brown Brothers Harriman, the forthcoming inflation figures “would leave inflation above the RBA’s year-end forecasts of 3.6% for headline and 3.3% for trimmed mean,” lending weight to Deputy Governor Andrew Hauser’s recent warning. Hauser described the inflation outlook as “materially worse” than the assessment made in August. BBH also says that “firmer inflation would also strengthen the case for a back-to-back 25bps RBA cash rate hike to 4.85% at the next November 3 meeting (70% pried in) and widen AUD’s yield advantage.”

At around 102.25, close to two-week highs, the US Dollar Index (DXY) reflects a continued recovery in the Greenback against a basket of six major currencies. The rebound follows a period of weakness in the US Dollar, when AI-related concerns in equity markets prompted investors to seek government bonds, driving Treasury yields down.

Position adjustments before the Fed’s interest rate decision are underpinning the recovery. Following September’s 25 basis point (bps) increase, policymakers are widely expected to keep rates at 3.75%-4.00%. Attention will therefore turn to the policy statement and the press conference by Chair Kevin Warsh.

Inflation remains above the Fed’s 2% target, leaving traders to judge whether policymakers bolster or dampen expectations for a December rate increase. According to the CME FedWatch Tool, markets currently price the likelihood at around 80%.