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Australian Dollar Gains as Hawkish RBA Remarks Fuel Rate Hike Bets
The Australian dollar gained 0.3% against its U.S. counterpart on Friday, trading at 0.7129, after hawkish testimony from the Reserve Bank of Australia's governor sent market expectations for another interest rate hike soaring.
Bullock Flags Growing Inflation Risks
The rally was primarily driven by comments from RBA Governor Michele Bullock before a parliamentary committee. Bullock stated that upside inflation risks previously identified by the central bank in August are now actively materializing, according to a report from Investing.com.
She cited several key pressures contributing to the outlook, including rising oil prices stemming from the Middle East, a global investment boom in artificial intelligence, and the economic impact of extreme weather events.
Markets Sharply Reprice RBA Outlook
The governor's pointed remarks triggered a significant repricing in interest rate markets, as traders boosted bets on further monetary tightening. Following the testimony, market-implied odds of an RBA rate hike at its September 29 meeting surged to 93%.
AdKey market shifts based on the comments include:
- The expected terminal rate, or the peak of the hiking cycle, is now projected to reach 4.85% by early 2027.
- Investment bank UBS updated its forecast, now projecting two additional RBA rate increases to a terminal rate of 4.85%.
U.S. Dollar Softness Provides a Tailwind
The Australian dollar's advance was also supported by a modest softening in the U.S. dollar. U.S. Treasury yields eased back from a recent rally that followed the Federal Reserve's latest meeting, slightly reducing the greenback's relative attractiveness.
However, the Fed's own hawkish stance is expected to provide a floor for the U.S. currency, potentially capping gains for currencies like the AUD. This comes as Fed officials continue to signal that further rate increases are possible to combat inflation.
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