Australian dollar strengthens as surprise inflation rise pressures RBA to stay cautious
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Daily Currency Update
The Australian dollar is trading firmly above the US$0.6500 mark at the time of writing, buoyed by a stronger-than-expected inflation reading that has shifted market sentiment and revived expectations of a more cautious Reserve Bank of Australia (RBA). The latest data from the Australian Bureau of Statistics (ABS) showed that the country’s new “complete” monthly Consumer Price Index (CPI) accelerated to 3.8% year-on-year in October, surpassing both the market consensus of 3.6% and the previous month’s reading of 3.5%. This upside surprise reinforces the view that inflationary pressures remain more persistent than policymakers would prefer. While the new monthly CPI gauge is more comprehensive than the earlier partial measure, it remains somewhat volatile. Services inflation—an area the RBA watches closely due to its stickiness—remains elevated, suggesting that disinflation is losing momentum. Financial markets responded quickly to the report, with traders modestly increasing the probability of additional policy tightening or, at a minimum, a longer period of restrictive interest rates. The Australian dollar’s rise above US$0.6500 reflects this repricing, as investors reassess the likelihood that the RBA will deliver any near-term policy relief. Bond yields also edged higher following the release, underscoring renewed expectations that the central bank may maintain a hawkish tone in upcoming communications. RBA officials have recently highlighted that, although there are early signs of cooling in some segments of the economy, the overall backdrop remains resilient. The labour market—while showing incremental softening—continues to display what policymakers have described as “healthy” conditions. Employment levels remain historically high, and although job vacancies have eased from their peak, they continue to sit above pre-pandemic norms. This relative strength provides the central bank with less urgency to pivot toward monetary easing, especially at a time when consumer prices are proving stubborn. Moreover, the RBA has repeatedly emphasised that its primary objective remains returning inflation to the 2–3% target band within a reasonable time frame. Policymakers have stressed that progress toward this goal has been uneven, and that risks remain tilted toward inflation staying higher for longer if policy becomes prematurely accommodative. With the December policy meeting approaching, the latest inflation figures complicate the RBA’s decision-making landscape. While a rate hike at the next meeting is not the base case for most analysts, the data significantly reduces the likelihood of any dovish shift. Instead, the central bank is expected to reaffirm its readiness to tighten policy further if inflation fails to ease in a sustained manner. For now, the Australian dollar continues to benefit from the renewed hawkish narrative, with traders closely watching upcoming data releases for confirmation of whether October’s inflation surge represents a temporary bump or a renewed trend.Key Movers
The US dollar (USD) remains under pressure as mounting evidence of an economic slowdown continues to shift market sentiment firmly toward expectations of near-term Federal Reserve (Fed) easing. The US Dollar Index (DXY) is holding near 99.80 at the time of writing, extending its recent declines as investors increasingly anticipate that the Fed will deliver a 25-basis-point rate cut in December. According to the CME FedWatch tool, the probability of such a move has surged to more than 84%, a dramatic rise from roughly 50% just one week earlier. A string of softer US economic data has driven this repricing. Producer Price Index (PPI) figures for September revealed further moderation in underlying price pressures, with core PPI easing in line with the recent disinflation trend visible across several sectors. While headline inflation remains above the Fed’s long-run target, the sustained cooling in producer-level price growth suggests that pipeline pressures are abating, reducing the urgency for the central bank to maintain a restrictive stance. Consumer activity—long the engine of US economic resilience—also shows signs of fatigue. Retail Sales for the latest month rose only 0.2% month-on-month, a notable deceleration from earlier readings that reflected stronger household demand. Several categories saw outright declines, indicating that elevated borrowing costs and fading excess savings are weighing more heavily on consumption patterns. Economists note that while the US consumer remains relatively stable, momentum is clearly slowing. At the same time, household sentiment has deteriorated sharply. The Conference Board’s Consumer Confidence Index dropped to 88.7 in November, marking one of its weakest levels in recent years. The decline was broad-based, capturing heightened anxieties about the economic outlook, inflation, and labour-market conditions. The expectations component, which gauges views about the next six months, fell particularly hard—a development often associated with caution around discretionary spending and major purchases. The combination of easing inflation, softer consumer activity, and weakening sentiment has strengthened the argument for a December policy adjustment. Fed officials have recently acknowledged that financial conditions have tightened considerably through market channels, even without additional policy actions. With growth indicators cooling and price pressures retreating, a number of policymakers have signalled a greater willingness to consider rate cuts if the data trajectory continues. For the US dollar, the shift in rate expectations has been decisive. Lower yields and diminishing carry appeal have pushed the currency lower against major peers, with traders positioning for a potentially more dovish Fed stance heading into 2025. Should upcoming economic releases reinforce the slowing trend, the USD may remain on the defensive in the near term, with broader direction likely to hinge on incoming inflation data and the Fed’s communication in the weeks ahead.Expected Ranges
- AUD/USD: 0.6400 - 0.6600 ▲
- AUD/EUR: 0.5500 - 0.5700 ▲
- GBP/AUD: 2.0200 - 2.0400 ▼
- AUD/NZD: 1.1350 - 1.1550 ▼
- AUD/CAD: 0.9050 - 0.9250 ▲