The Australian Dollar (AUD) traded slightly higher against most major currencies on Tuesday, with the exception of the US Dollar (USD), following the release of the Reserve Bank of Australia (RBA) July policy meeting minutes. The AUD was strongest against the Japanese Yen, showing a 0.09% gain, while it was slightly down against the USD, trading near 0.7147 in the European session [1].
The RBA minutes revealed that several board members considered an interest rate hike 'quite possible' if upside risks to inflation materialize. Specifically, the minutes stated, 'Several board members judged quite possible upside risks to inflation would crystallise.' The board discussed either raising the Official Cash Rate (OCR) by 25 basis points or leaving it unchanged at 4.35% [1].
Despite the hawkish tone in the RBA minutes and warnings about inflation risks, financial markets are not expecting an immediate rate hike. Market participants are pricing in only a 13% chance of a rate increase to 4.6% at the next RBA meeting on September 28 and 29, while the probability of a move by February next year stands at about 67%, according to Reuters [1].
Looking ahead, the next significant event for the AUD will be the release of July's Consumer Price Index (CPI) data on Wednesday. Economists at Wells Fargo anticipate that the July CPI will be 'another test of whether the inflation relief seen in June can be sustained.' They forecast headline inflation to rise 1.0% in July, bringing the year-over-year rate down to 3.4%, with trimmed mean inflation remaining at 3.6% year over year [1].
CONCLUSION
The Australian Dollar saw modest gains after the RBA minutes signaled that a rate hike remains a possibility if inflation risks increase. However, markets remain cautious, with only a slim chance of an immediate rate move priced in. The upcoming July CPI data is expected to be a key determinant for the RBA's next steps.