Australian Dollar Hits 3-Month High as Hot Inflation Revives RBA Rate Hike Bets

The Australian dollar surged to a three-month peak against its U.S. counterpart on Friday, as hotter-than-expected inflation data reignited speculation that the Reserve Bank of Australia (RBA) may resume its interest rate hiking cycle.

The AUD/USD currency pair rose approximately 0.1% to trade at $0.72, its highest level since May 15, according to market data. The currency is on track to post a weekly gain of 0.4%, which would mark its fifth consecutive week of advances.

Inflation Data Fuels Rate Speculation

The move was driven by official data released this week showing an unexpected acceleration in key inflation metrics for July. The figures prompted traders to reassess the outlook for Australian monetary policy.

Key inflation readings included:

• Monthly Consumer Price Index (CPI): Rose 1.0% month-over-month, exceeding economists' forecasts of 0.8%.
• Annual CPI: Eased to 3.5% from 3.8% in the prior month.
• Trimmed Mean CPI (Annual): The RBA's preferred measure of underlying inflation, accelerated to 3.6%.

Market Reaction and Outlook

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Following the inflation report, money markets significantly increased bets on another RBA rate hike. The implied probability of an interest rate increase at the central bank's September meeting jumped to approximately 38%, up from 17% before the data was published.

"The strong monthly CPI for July has certainly lifted the possibility of an RBA hike in November," analysts at Westpac wrote in a client note. However, they cautioned that they "do not think this one data point is enough to see the market fully turn and price in a hike."

RBA Policy Context

The RBA has already raised its official cash rate three times this year but opted to hold it steady at 4.35% at its August meeting. The central bank has consistently stated that inflation remains too high and has projected that it will not return to the midpoint of its target range until early 2028.

This latest inflation data challenges the narrative that the bank's tightening cycle is complete, placing renewed focus on upcoming economic indicators ahead of the RBA's next policy decisions.