Australian Dollar edges higher above 0.7050 as hot CPI lifts RBA rate hike odds
- AUD/USD drifts higher to around 0.7055 in Thursday’s Asian session.
- Market expectations for an RBA rate hike had jumped to 82% following hot CPI data.
- Fed kept its benchmark interest rate unchanged on Wednesday; Warsh offered no clear steer on a December move.
The AUD/USD pair gathers strength to near 0.7055 during the Asian trading hours on Thursday. The Australian Dollar (AUD) edges higher against the US Dollar (USD) as hotter inflation data bolsters expectations of Reserve Bank of Australia (RBA) rate hikes. The US September Personal Consumption Expenditures (PCE) inflation report will be in the spotlight later on Thursday.
Australia’s headline Consumer Price Index (CPI) accelerated to 4.3% YoY in September, compared to 4.0% in August, the Australian Bureau of Statistics revealed on Wednesday. This figure came in above the market consensus of 4.2%. On a monthly basis, the CPI inflation rose to 0.8% in September, up from 0.4% in the previous reading.
This report has boosted the case for an RBA rate hike in the upcoming meeting and supports the Aussie. Markets are now pricing in nearly an 82% chance of an interest rate increase to 4.85% at the next RBA Board meeting, up from 62% before the data was released, according to the ASX RBA Rate Tracker.
On Wednesday, the US Federal Reserve (Fed) held its benchmark interest rate steady at 3.75%-4.00%, as widely expected. According to the statement, the central bank upgraded its assessment of the economy but acknowledged that inflation "remains elevated.”
During the press conference, Fed Chairman Kevin Warsh did not offer guidance on the outlook, but acknowledged the central bank had not achieved price stability. "We're working on it," Warsh said. Traders are pricing in a 78% chance of a hike in December, the CME FedWatch tool showed.
"Warsh's silence on further rate hikes was interpreted as dovish, or not hawkish enough," said Carol Kong, a currency strategist at Commonwealth Bank of Australia.
Australia inflation surprise bolsters RBA hike expectations and supports the Aussie
Strategists at Brown Brothers Harriman highlight that the latest Australia inflation data “beat expectations, strengthening the case for another RBA hike and underpinning AUD.” They note that September headline CPI “rose 4.3% y/y (consensus: 4.2%) vs. 4.0% in August reflecting rising housing and transport costs,” leaving price pressures running hotter than the central bank had anticipated.
BBH stresses 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%.” In their view, “this argues for additional tightening,” with RBA cash rate futures having “raised odds of a 25bps hike to 4.85% on November 3 from 60% to 85%, and increased bets on another hike in Q1.”
On the core measures, BBH points out that “trimmed mean CPI matched consensus at 3.6% y/y up from 3.5% in August.” However, they emphasize that “the policy-relevant Q3 trimmed mean CPI ran hot at 3.7% y/y (consensus: 3.6%) vs. 3.6% in Q2,” reinforcing the view that underlying inflation remains uncomfortably elevated for the RBA.
Warsh flags investment surge and AI risks but avoids pre-committing on rates
Fed Chair Warsh’s speech scores 5.6/10 on the FXS Speechtracker, modestly softer relative to the historical average of 6.1/10, reflecting a cautious tone despite upbeat comments on structural growth and an investment surge. The remark about being “over-scarred from the global financial crisis” underscores a persistent risk-awareness that tempers optimism, while repeated refusals to prejudge the October and December meetings keep rate expectations deliberately opaque even as Warsh highlights AI and investment as key upside forces. Overall, the tone is balanced: supportive of continued growth and AI-driven productivity, yet framed by an emphasis on financial stability and tail risks that limits any fresh hawkish signal for the Dollar.
The FXS Fed Sentiment Index was unchanged, moving 0.00 points to a still-elevated level of 127.51, indicating that the speech left the perceived policy stance firmly in hawkish territory despite the lack of incremental tightening cues. The steady index reading, combined with the slightly below-baseline FXS Speechtracker score, suggests the Dollar’s existing hawkish premium remains intact but was not meaningfully reinforced by this appearance.
Technical Analysis: AUD/USD keeps a bullish vibe above the 100-day SMA
In the daily chart, AUD/USD holds a mildly bullish near-term bias as spot trades above the 100-day simple moving average (SMA) and the Bollinger middle band, suggesting a constructive underlying trend after the recent recovery from sub-0.70 levels. The Relative Strength Index (RSI) at 57 is in positive territory without being overbought, hinting that upside momentum is improving but not stretched.
On the topside, immediate resistance is located at the Bollinger upper band near 0.7065, where the current advance is starting to meet headwinds. On the downside, initial support is seen at the 100-day SMA at 0.7035, followed by the Bollinger middle band around 0.6990, while a deeper pullback would likely find firmer demand toward the lower Bollinger band near 0.6915.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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