The Australian dollar strengthened to a three-month peak on Friday and was on course for a solid weekly advance after inflation data for July came in hotter than economists had anticipated, renewing speculation that the Reserve Bank of Australia could resume raising interest rates.
The AUD/USD pair was trading around $0.72, up about 0.1% at the time, marking its highest level since May 15. That move left the pair set for roughly a 0.4% gain over the week, which would be its fifth straight weekly increase.
Official figures released this week showed Australia's consumer price index rose 1.0% in July from June, above consensus forecasts for a 0.8% rise. On an annual basis, headline inflation eased to 3.5% from 3.8% in the prior reading.
More consequential for the RBA, the trimmed mean - the central bank's preferred gauge of underlying inflation - increased by 0.5% month-on-month and accelerated to 3.6% on a year-on-year basis.
Markets reacted to the stronger-than-expected prints by materially shifting expectations for further monetary tightening. After the report, pricing implied roughly a 38% chance of a rate hike in September, up from about 17% before the data were published.
"The strong July monthly CPI does raise the chance of an RBA hike in November," Westpac analysts said in a note. "But we do not think this one data point is enough to rush all the way to the other side of boat and lock in a hike."
The RBA held its cash rate at 4.35% in August, following three increases earlier in the year. In its August decision, the bank said inflation remained too high and did not expect inflation to return to the midpoint of its target range until early 2028.
Market context and implications
- Stronger monthly CPI has elevated near-term market odds of further RBA tightening.
- The trimmed mean reading - a key RBA focus - showed additional upside momentum on both monthly and annual bases.
- Moves in the AUD/USD reflect shifting expectations for policy rather than fresh fundamental change in the currency itself.
The currency's advance through the week illustrates how sensitive markets remain to domestic inflation surprises when pricing future central bank action. The shift in expected policy timing has had an immediate effect on short-term pricing, pushing the Australian dollar higher as investors reassess the likely path of interest rates.