The Australian Dollar (AUD) outperformed its major currency peers on Wednesday, trading 0.2% higher to near 0.7180 against the US Dollar (USD) during the early European trading session. This strength was attributed to hotter-than-expected Australian Consumer Price Index (CPI) data, which has increased market expectations for another interest rate hike by the Reserve Bank of Australia (RBA) this year [1].
According to the Australian Bureau of Statistics, price pressures grew by 1% Month-on-Month (MoM) in July, surpassing estimates of 0.8%. In contrast, June's inflation data showed a decline of 0.1%. On an annualized basis, CPI growth was reported at 3.5%, higher than the 3.2% estimate but lower than the previous reading of 3.8% [1].
Market participants responded by raising the probability of a fourth RBA rate hike at the September policy meeting to 36%, up from 17%. The likelihood of a rate move by February next year is now priced at 94% [1]. RBA minutes from the July policy meeting indicated that several board members consider an interest rate hike "quite possible" if upside inflation risks materialize [1].
The AUD was the strongest against the New Zealand Dollar among major currencies, as reflected in the day's percentage changes. Meanwhile, investors are also awaiting the US Personal Consumption Expenditure Price Index (PCE) data for July, with expectations that the US core PCE inflation will remain steady at 3.3% Year-on-Year (YoY) and monthly figures rising at a 0.2% pace, faster than June's 0.1% [1].
CONCLUSION
Hotter-than-expected Australian CPI data has significantly boosted the Australian Dollar and increased market expectations for a near-term RBA rate hike. The market now sees a much higher probability of policy tightening, reflecting heightened sensitivity to inflation data. Investors are also closely watching upcoming US inflation figures for further market direction.