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

The Australian dollar climbed to a three-month high on Friday and is positioned for a fifth consecutive weekly gain after hotter-than-expected inflation data intensified speculation that the Reserve Bank of Australia (RBA) may resume its interest rate hiking cycle.

Inflation Data Fuels Hawkish Bets

Data released this week showed Australia's monthly consumer price index (CPI) rose 1.0% in July from June, significantly above economists' forecasts of a 0.8% increase, according to the source report. While annual inflation eased to 3.5% from 3.8%, the RBA's preferred measure of underlying inflation, the trimmed mean, accelerated to 3.6% annually.

This unexpected strength in core inflation challenges the view that the central bank was finished with its monetary tightening campaign. The RBA's primary mandate is to control inflation, and persistent price pressures could force it to take further action.

Market Reacts to Shifting Outlook

In response to the data, the AUD/USD currency pair rose to $0.72, its highest level since May 15. The pair was on track for a 0.4% weekly gain, marking its fifth straight week of advances.

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Traders swiftly repriced the odds of another RBA rate increase. According to the report, market pricing showed the probability of a rate hike at the RBA's September meeting jumped to approximately 38%, up from just 17% before the inflation figures were published.

RBA's Path Forward Remains Uncertain

The RBA held its cash rate steady at 4.35% in August but maintained a hawkish stance, noting that inflation remained too high. The central bank's projections do not see inflation returning to the midpoint of its target range until early 2028.

While the latest CPI figures increase the likelihood of further tightening, some analysts advise caution. "The strong July monthly CPI does raise the chance of an RBA hike in November," Westpac analysts said in a note cited by the source. "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."