Hot CPI inflation and hawkish RBA bolster rate hike bets, lifting Australian Dollar slightly

• Friday’s Asian trading sees AUD/USD advance towards 0.7035.
• Stronger-than-forecast Australian inflation, alongside hawkish RBA comments, has reinforced expectations of a rate rise.
• At the close of its October meeting, the Fed kept its target interest rate range unchanged at 3.75% to 4.00%.

Stronger-than-expected Australian CPI inflation has fuelled expectations of Reserve Bank of Australia (RBA) rate increases, lifting the Australian Dollar (AUD) against the US Dollar (USD). In Friday’s Asian session, AUD/USD strengthens towards 0.7035.

September’s annual Australian Consumer Price Index (CPI) inflation reached 4.3%, up from 4.0% in August, according to figures published by the Australian Bureau of Statistics on Wednesday. The reading exceeded the market consensus of 4.2%. According to RBA Governor Michele Bullock, the price pressures that had concerned the central bank were beginning to materialise.

With the RBA due to meet next Tuesday, the release has strengthened the argument for a rate rise and lent support to the Aussie. According to the ASX RBA Rate Tracker, markets now assign nearly an 80% probability to an increase in interest rates to 4.85% at the next RBA Board meeting, compared with 62% before the release.

The US Federal Reserve (Fed) opted on Wednesday to hold its benchmark federal funds rate within the existing 3.75% to 4% range. Dissenting from the decision, Governor Lisa Cook and Cleveland Fed President Beth Hammack favoured a 25 basis point (bps) increase.

Incoming figures would, policymakers said, hopefully provide guidance for their next decision. The CME FedWatch tool puts the probability of a December rate increase priced in by traders at 74.9%.

Australian inflation surprise supports the Aussie as RBA rate rise expectations strengthen

The latest Australian inflation figures, according to strategists at Brown Brothers Harriman, “beat expectations, strengthening the case for another RBA hike and underpinning AUD.” Price pressures exceeded the central bank’s expectations, with September headline CPI rising “4.3% y/y (consensus: 4.2%) vs. 4.0% in August reflecting rising housing and transport costs,” according to the strategists.

Against the RBA’s August assessment, BBH stresses that “inflation is materially worse than the RBA assessed in August, when it forecast year-end headline CPI at 3.6% and trimmed mean at 3.3%.” The strategists conclude that “this argues for additional tightening,” noting that RBA cash rate futures have “raised odds of a 25bps hike to 4.85% on November 3 from 60% to 85%, and increased bets on another hike in Q1.”

Turning to underlying price pressures, BBH notes that “trimmed mean CPI matched consensus at 3.6% y/y up from 3.5% in August.” The more significant reading for monetary policy was that “the policy-relevant Q3 trimmed mean CPI ran hot at 3.7% y/y (consensus: 3.6%) vs. 3.6% in Q2,” supporting the assessment that underlying inflation is still uncomfortably high for the RBA.

Warsh reaffirms price stability commitment, sustaining bullish Dollar sentiment

A reading of 7/10 on the FXS Speechtracker, in line with the historical average, places Warsh’s press conference firmly within the established baseline and points to an unchanged hawkish position. His statement that “ensuring price stability is not about a fixed date on a calendar” underlines an approach guided by data and outcomes. Meanwhile, repeated mentions of “new monetary medicine,” the withdrawal of accommodation and confidence in inflation expectations indicate a continuing determination to curb inflation rather than promise an early policy pivot. A firm 2% PCE objective, rejection of a “soft” inflation target and acknowledgement that interest rates are tightening financial conditions and influencing new technology and CAPEX together convey enduring policy resolve, broadly supportive of the Dollar.

An increase of +14.39 points took the FXS Fed Sentiment Index to 141.89, further into hawkish territory and consistent with the FXS Speechtracker’s unchanged 7/10 reading. The index remains well above the neutral 100 level. Combined with a firm commitment to 2% price stability, the acknowledgement that “monetary medicine is starting to work” suggests markets should keep pricing in a relatively restrictive Fed policy trajectory. Such a backdrop typically supports the Dollar against the Euro and Yen.

Technical Analysis: AUD/USD retains a mildly bullish near-term bias

Trading above both the 100-day simple moving average (SMA) and the middle Bollinger band, AUD/USD retains a mildly bullish daily-chart bias, with underlying demand apparently supporting the recent recovery. At 53.4, the Relative Strength Index (RSI) has moved into neutral-to-positive territory. This suggests buyers still have the advantage, although the pair has yet to reach overbought levels.

The upper Bollinger band, around 0.7065, provides the nearest resistance; a sustained move above it would pave the way for a longer recovery. Initial support lies at 0.7035, the 100-day SMA, ahead of the middle Bollinger band near 0.6995. If the retreat extended to the lower Bollinger band at 0.6925, fresh buying interest would likely emerge, leaving the broader constructive outlook intact.

(The technical analysis of this story was written with the help of an AI tool. Know more.)