Australian Dollar edges higher as hot CPI inflation and hawkish RBA lift rate hike bets
- AUD/USD gains ground to near 0.7035 in Friday’s Asian session.
- Australia’s hotter-than-expected inflation and hawkish remarks from the RBA have boosted expectations of rate hike.
- Fed held steady on rates at the conclusion of its October meeting, maintaining its target range of 3.75% to 4.00%.
The AUD/USD pair gathers strength to near 0.7035 during the Asian trading hours on Friday. The Australian Dollar (AUD) edges higher against the US Dollar (USD) as hotter Australian CPI inflation data has bolstered expectations of Reserve Bank of Australia (RBA) rate hikes.
The Australian Consumer Price Index (CPI) inflation rose to 4.3% YoY in September from 4.0% in August, the Australian Bureau of Statistics showed on Wednesday. This figure came in above the market consensus of 4.2%. RBA Governor Michele Bullock said that the price pressures the RBA had been worried about were starting to emerge.
This report has boosted the case for the RBA rate hike in the upcoming meeting next Tuesday and support the Aussie. Markets are now pricing in nearly a 80% 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) decided to leave its benchmark federal funds rate unchanged in a range of 3.75% to 4%. Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented, preferring to hike rates by 25 basis points (bps).
Policymakers stated that they hoped incoming data would help inform their next decision. Traders are pricing in a 74.9% probability of a hike in December, according to the CME FedWatch tool.
Australia inflation surprise bolsters RBA hike bets and supports the Aussie
Strategists at Brown Brothers Harriman note that the latest Australia inflation data “beat expectations, strengthening the case for another RBA hike and underpinning AUD.” 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 highlights 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.” More importantly for policy, “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 doubles down on price stability pledge, keeping Dollar bulls engaged
Warsh’s press conference tone is firmly consistent with the established baseline, with the FXS Speechtracker score at 7/10 matching the historical average and underscoring a steady hawkish stance. The key remark that “ensuring price stability is not about a fixed date on a calendar” reinforces a data-dependent, outcome-focused approach, while repeated references to “new monetary medicine,” removal of accommodation, and confidence in inflation expectations signal ongoing commitment to quashing inflation rather than pre-committing to a rapid pivot. Emphasis on a hard 2% PCE target, rejection of a “soft” inflation goal, and acknowledgement that interest rates are tightening financial conditions and affecting new technology and CAPEX all support a narrative of persistent policy resolve that is broadly supportive for the Dollar.
The FXS Fed Sentiment Index jumped by +14.39 points to 141.89, pushing sentiment deeper into hawkish territory and aligning with the unchanged 7/10 FXS Speechtracker score. With the index far above the neutral 100 line, the combination of a firm 2% price stability pledge and recognition that “monetary medicine is starting to work” suggests markets should continue to price a relatively restrictive Fed path, a backdrop that tends to underpin the Dollar against the Euro and Yen.
Technical Analysis: AUD/USD keeps a modest bullish outlook in the near term
In the daily chart, AUD/USD holds a modest bullish bias as price sits above the 100-day simple moving average (SMA) and the Bollinger middle band, suggesting the recent rebound is supported by underlying demand. The Relative Strength Index (RSI) at 53.4 has shifted into neutral-to-positive territory, hinting that buyers retain the upper hand without yet pushing the pair into overbought conditions.
On the topside, immediate resistance is located at the upper Bollinger band around 0.7065, where a sustained break would open the door to a more extended recovery. On the downside, initial support is seen at the 100-day SMA at 0.7035, followed by the Bollinger middle band near 0.6995; a deeper pullback toward the lower Bollinger band at 0.6925 would likely attract fresh buying interest while keeping the broader constructive tone intact.
(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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