Australian Dollar: Tests resistance on firm inflation – OCBC

OCBC Bank strategists Sim Moh Siong and Christopher Wong note Australian inflation surprised on the upside, keeping alive the risk of another Reserve Bank of Australia (RBA) hike even as their base case is that the tightening cycle has ended. Markets now fully price a 25bp hike by February 2027, helping AUD/USD retest 0.7180–0.7200. They remain constructive on the Australian Dollar (AUD) over the next one to two quarters.

Firm CPI keeps RBA risk alive

"Australian headline inflation eased from 3.8% YoY in June to 3.5% YoY in July, while trimmed mean inflation held steady at 3.6% YoY. Both measures came in above market expectations. The RBA is targeting an average trimmed mean inflation rate of 3.3% YoY in 2H26, making July's reading an unhelpful start to the second half of the year."

"Following the inflation release, markets fully priced an additional 25bp hike by February 2027, up from around a 70% probability beforehand. This has helped AUD/USD retest resistance in the 0.7180-0.7200 range."

"We remain constructive on AUD over the next one to two quarters, supported by its attractive carry and the potential for further Chinese policy stimulus. While the RBA is likely finished tightening, sticky inflation means another hike cannot be ruled out."

"Over the medium term, however, we expect AUD gains to become more gradual as growth slows, inflation continues to move towards target, and the RBA begins shifting away from a restrictive policy stance."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)