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

Buyers lift AUD/USD towards 0.7035 during Asian trading on Friday.
Rate hike expectations have strengthened following an upside surprise in Australian inflation and hawkish RBA comments.
At the close of its October meeting, the Fed left its target rate range unchanged at 3.75% to 4.00%.

Buying interest pushes AUD/USD towards 0.7035 in Friday’s Asian session, with the Australian Dollar (AUD) making modest gains against the US Dollar (USD). Stronger-than-expected Australian CPI inflation has reinforced expectations that the Reserve Bank of Australia (RBA) will raise interest rates.

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 figures released by the Australian Bureau of Statistics on Wednesday. The reading exceeded the market forecast of 4.2%. According to RBA Governor Michele Bullock, the price pressures that had concerned the central bank were beginning to materialise.

The inflation release has lent support to the Aussie by strengthening the argument for an RBA rate increase at next Tuesday’s meeting. According to the ASX RBA Rate Tracker, markets now assign nearly an 80% probability to a rise in interest rates to 4.85% at the next RBA Board meeting, compared with 62% before the release.

The US Federal Reserve (Fed), meanwhile, kept its benchmark federal funds rate within a range of 3.75% to 4% on Wednesday. Dissenting from that decision, Governor Lisa Cook and Cleveland Fed President Beth Hammack favoured a 25 basis points (bps) increase.

Incoming data would, policymakers said, hopefully provide guidance for their next decision. The CME FedWatch tool shows traders assigning a 74.9% chance to a December rate increase.

How is Australia’s inflation surprise supporting the Aussie and RBA hike expectations?

A stronger case for further RBA tightening is supporting the currency, according to Brown Brothers Harriman strategists, who say the latest Australian inflation figures “beat expectations, strengthening the case for another RBA hike and underpinning AUD.” Price pressures exceeded the central bank’s expectations as September headline CPI increased “4.3% y/y (consensus: 4.2%) vs. 4.0% in August reflecting rising housing and transport costs,” the strategists note.

Comparing the figures with the RBA’s earlier projections, BBH observes 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,” noting that 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 inflation also remains uncomfortably high for the RBA, in BBH’s assessment. While “trimmed mean CPI matched consensus at 3.6% y/y up from 3.5% in August,” the strategists draw particular attention to the policy implications of the quarterly reading: “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.

Can Warsh’s renewed price stability commitment sustain Dollar bulls’ interest?

Support for the Dollar remains evident in Warsh’s firm policy message at the press conference. An FXS Speechtracker reading of 7/10, equal to the historical average, indicates that his tone remains in line with the established hawkish baseline. His statement that “ensuring price stability is not about a fixed date on a calendar” highlights an approach guided 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 bringing inflation under control, rather than a prior commitment to a swift policy pivot. The insistence on a firm 2% PCE target, rejection of a “soft” inflation objective and recognition that interest rates are tightening financial conditions while affecting new technology and CAPEX together signal enduring policy resolve, a broadly supportive backdrop for the Dollar.

Hawkish sentiment strengthened further as the FXS Fed Sentiment Index rose by +14.39 points to 141.89, consistent with the FXS Speechtracker score holding at 7/10. The index remains well above the neutral 100 mark. Against that backdrop, a firm commitment to 2% price stability, alongside the acknowledgement that “monetary medicine is starting to work”, suggests markets should keep factoring in a relatively restrictive Fed policy path. Such conditions tend to support the Dollar against the Euro and Yen.

Technical Analysis: Can AUD/USD sustain its mildly bullish near-term bias?

Underlying buying demand appears to be supporting AUD/USD’s recent recovery, with the daily chart showing the pair above both its 100-day simple moving average (SMA) and the middle Bollinger band. This positioning preserves a mildly bullish bias. At 53.4, the Relative Strength Index (RSI) has moved into neutral-to-positive territory, suggesting buyers maintain an advantage without taking the pair into overbought territory.

The upper Bollinger band, around 0.7065, presents the first upside hurdle; a sustained move above it would pave the way for a broader recovery. Initial downside support lies at 0.7035, the 100-day SMA, ahead of the middle Bollinger band near 0.6995. Should the pair retreat further towards 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: frequently asked questions

Which factors have the greatest influence on the Australian Dollar?

The Australian Dollar (AUD) is particularly sensitive to the interest rates set by the Reserve Bank of Australia (RBA). Australia’s wealth of natural resources also makes the price of iron ore, its largest export, an important influence. Other drivers include economic conditions in China, Australia’s biggest trading partner, alongside domestic inflation, economic growth and the trade balance. Investor appetite for risk matters as well: a shift towards riskier assets, known as risk-on sentiment, supports the AUD, while risk-off conditions see investors favour safe havens.

Why do Reserve Bank of Australia decisions matter for the Australian Dollar?

By determining the interest rate at which Australian banks can lend to one another, the Reserve Bank of Australia (RBA) affects borrowing rates across the economy and, in turn, the Australian Dollar (AUD). Its primary objective is to keep inflation stable at 2-3%, using increases or reductions in interest rates. Rates that are relatively high compared with those of other major central banks support the AUD; relatively low rates have the reverse effect. The RBA can additionally alter credit conditions through quantitative easing, which is negative for the AUD, or quantitative tightening, which is positive for the currency.

Why is China’s economic performance important for the Australian Dollar?

As Australia’s largest trading partner, China has a substantial influence on the Australian Dollar (AUD). A healthy Chinese economy buys more Australian raw materials, goods and services, increasing demand for the currency and lifting its value. When Chinese growth falls short of expectations, the reverse applies. Consequently, upside or downside surprises in China’s growth figures often directly affect the Australian Dollar and the currency pairs in which it trades.

Why do iron ore prices influence the Australian Dollar?

Changes in iron ore prices can move the Australian Dollar because the commodity is Australia’s biggest export. Figures from 2021 put its annual export value at $118 billion, with China the main destination. Rising iron ore prices generally lift overall demand for the AUD and strengthen the currency, while falling prices tend to have the opposite effect. Higher prices also increase the likelihood of an Australian trade surplus, providing another source of support for the AUD.

Why does the trade balance matter for the Australian Dollar?

Another influence on the Australian Dollar is the trade balance: export earnings less spending on imports. When overseas buyers generate strong demand for Australian exports, the resulting demand for its currency, relative to spending on imports, raises its value. A positive net trade balance therefore supports the AUD, whereas a negative balance has the reverse effect.