Hotter inflation revives RBA tightening bets, lifting Australian Dollar modestly

• Expectations of additional monetary tightening in Australia support the Australian Dollar, which rises 0.08% on Friday.
• Prospects of a November interest rate hike strengthen after Australian inflation picks up to 4.3% in September.
• Persistent inflation pressures keep policymakers cautious as the Fed leaves interest rates unchanged.

Growing expectations of a Reserve Bank of Australia (RBA) interest rate hike underpin the Australian Dollar (AUD), lifting AUD/USD 0.08% on Friday to around 0.7035 at the time of writing. Stronger-than-anticipated inflation figures and recent hawkish comments from central bank officials have reinforced those expectations.

Renewed concerns over persistent price pressures leave the RBA with less scope to maintain its current monetary policy stance. Data published by the Australian Bureau of Statistics (ABS) on Wednesday showed September's Consumer Price Index (CPI) rising 4.3% YoY, up from 4% in August and above the market forecast of 4.2%.

Speculation about another interest rate increase at the monetary policy meeting on 3 November has also gathered momentum following comments from RBA Governor Michele Bullock. In a hawkish assessment, she indicated that the inflation pressures troubling the central bank were starting to materialise.

Markets now assign an 80% probability to an interest rate increase to 4.85% at the forthcoming meeting, according to the ASX RBA Rate Tracker, against 60% before the inflation release. The Australian Dollar draws support from this repricing, with investors increasingly expecting Australian interest rates to stay high for longer.

Uncertainty over the Federal Reserve's (Fed) policy path, meanwhile, weighs on the outlook for the US Dollar (USD). Having retained its benchmark interest rate in the 3.75%-4.00% range on Wednesday, the central bank stressed that forthcoming economic data would be important in shaping subsequent policy decisions.

Inflation risks remain under close scrutiny by Fed officials. Richmond Fed President Thomas Barkin said on Friday that a gradual approach to interest rates was still appropriate. While the broad direction of monetary policy was relatively clear, he noted, the central issue remained the speed of adjustments.

Increasingly broad-based cost pressures are leading US businesses to raise prices, Barkin added. He singled out the sharp rise in artificial intelligence investment as another contributor to inflation pressures, pointing to its effects on supply chains and aggregate demand.

A cautious Fed stance could therefore persist as inflation pressures linger. Even so, AUD/USD continues to find support in mounting expectations of Australian monetary tightening, with investor focus shifting to next week's RBA policy decision.

AUD/USD technical analysis: Can the pair clear nearby resistance?

A modestly bullish short-term bias remains intact on the one-hour chart as AUD/USD, trading at 0.7035, consolidates above its 100-period simple moving average (SMA) of 0.7032 and 200-period SMA of 0.7026. With the pair approaching the immediate horizontal resistance at 0.7040, the Relative Strength Index (14) near 52 points to steady buying interest that is not yet overstretched. This suggests pullbacks may draw buyers provided the price stays above the underlying moving-average support.

A move higher would first encounter resistance at 0.7040, followed by 0.7055 and a more substantial obstacle around 0.7068. Should the pair retreat, initial support lies at the 100-period SMA of 0.7032, with the 200-period SMA at 0.7026 next in line. Stronger corrective pressure would bring the lower horizontal support levels of 0.7010 and 0.6994 into focus.

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