Australian dollar dips slightly as surprise inflation jump clouds rate cut outlook
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Daily Currency Update
Overnight, the Australian dollar (AUD) posted a slight decline against the US dollar, easing by around 0.03% to trade near US$0.64975. This modest move reflects a relatively quiet trading session, marked by limited volatility and little market-moving data. Despite the minor dip, the AUD has shown some short-term resilience, rising approximately 0.5% over the past week. However, on a broader scale, the currency remains under pressure, having weakened by around 0.6% over the past month. This mixed performance highlights the AUD's ongoing struggle to gain firm traction; caught between supportive short-term drivers such as improved risk sentiment and elevated commodity prices, and more persistent headwinds like concerns over China’s economic outlook, global interest rate differentials, and domestic monetary policy uncertainty. The AUD remains range-bound for now, but is vulnerable to shifts in global risk appetite and macroeconomic developments.Adding to the complexity of the AUD’s outlook, Australia's July Consumer Price Index (CPI) surprised to the upside, rising 2.8% year-on-year, well above June’s 1.9% and the market consensus of 2.3%. This marks the highest annual inflation rate since July 2024 and was largely driven by a sharp spike in electricity prices, following the expiry of government electricity rebates for many households. Core inflation also accelerated, with the trimmed mean CPI climbing to 2.7% from 2.1% in June. The stronger-than-expected inflation print has prompted a reassessment of the Reserve Bank of Australia’s (RBA) policy outlook, with money markets now pricing in just a 22% chance of a rate cut in September, down from 30% before the data release. Nevertheless, expectations for monetary easing remain intact, with markets still assigning a 61% probability to a cut in November. The RBA continues to walk a tightrope, balancing persistent inflationary pressures against signs of a weakening labour market. While the inflation data may delay immediate policy action, the broader economic picture suggests that easing is still on the table later this year.
Key Movers
Overnight, the US Dollar Index (DXY) experienced a modest decline of around 0.2%, closing near the 97.90 level. This dip continues a recent trend of dollar softness, with the index hovering close to its lowest levels since early July. The primary driver behind this movement is growing market anticipation that the Federal Reserve may ease monetary policy sooner than previously expected. Signs of slowing economic growth in the US, coupled with easing inflation pressures, have led investors to price in a higher probability of a rate cut at the upcoming September policy meeting. This shift in expectations has put downward pressure on the US dollar, as lower interest rates typically reduce the appeal of the currency to investors seeking yield.Additionally, the broader risk sentiment has improved, with investors showing increased appetite for riskier assets such as equities and commodities, further weighing on the safe-haven US dollar. However, the US dollar remains sensitive to key economic data releases scheduled in the near term. Market participants are closely watching upcoming reports, including the Personal Consumption Expenditures (PCE) price index and labour market statistics, which will provide further clues about the health of the US economy and the Federal Reserve’s future policy path. Any surprises in these data points could trigger volatility in the DXY as investors reassess their expectations. Overall, while the US dollar has softened overnight, its trajectory remains closely tied to evolving economic fundamentals and central bank signals in the weeks ahead.
Expected Ranges
- AUD/USD: 0.6400 - 0.6600 ▲
- AUD/EUR: 0.5500 - 0.5700 ▲
- GBP/AUD: 2.0700 - 2.0900 ▼
- AUD/NZD: 1.1000 - 1.1200 ▲
- AUD/CAD: 0.8850 - 0.9050 ▼