Aussie Gains as Hot Inflation Fuels RBA Tightening Bets

Key Moments

Australian Dollar Supported by Inflation Upside Surprise

AUD/USD strengthened toward 0.7055 during Asian trading on Thursday, with the Australian Dollar gaining ground on the back of hotter-than-expected inflation data that reinforced expectations of further tightening by the Reserve Bank of Australia (RBA). Market participants were also awaiting the release of the US September Personal Consumption Expenditures (PCE) inflation report later in the day.

Data from the Australian Bureau of Statistics on Wednesday showed that headline Consumer Price Index (CPI) inflation accelerated to 4.3% year-on-year in September, up from 4.0% in August and above the 4.2% market forecast. On a month-on-month basis, CPI increased 0.8% in September, doubling the prior 0.4% reading.

The upside surprise in price growth has strengthened the case for an additional RBA rate increase and provided fresh support to the Aussie. According to the ASX RBA Rate Tracker, markets are now assigning nearly an 82% probability of a move to 4.85% at the next RBA Board meeting, up from 62% before the CPI figures were published.

Federal Reserve Holds Rates, Markets Eye December Move

On Wednesday, the US Federal Reserve kept its benchmark interest rate unchanged at 3.75%-4.00%, in line with broad expectations. The accompanying statement signaled an improved view of the US economy while noting that inflation “remains elevated.”

During the press conference, Fed Chairman Kevin Warsh avoided providing explicit guidance on the policy path but acknowledged that the central bank has not yet restored price stability. “We’re working on it,” Warsh said. According to the CME FedWatch tool, traders are pricing in a 78% chance of another rate increase in December.

“Warsh’s silence on further rate hikes was interpreted as dovish, or not hawkish enough,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

Strategists See Stronger Case for RBA Tightening

Strategists at Brown Brothers Harriman (BBH) emphasized that the latest Australian inflation report “beat expectations, strengthening the case for another RBA hike and underpinning AUD.” They pointed out that September headline CPI “rose 4.3% y/y (consensus: 4.2%) vs. 4.0% in August reflecting rising housing and transport costs,” leaving inflation running above what the central bank had anticipated.

BBH noted 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%.” They argued that “this argues for additional tightening,” highlighting that RBA cash rate futures had “raised odds of a 25bps hike to 4.85% on November 3 from 60% to 85%, and increased bets on another hike in Q1.”

On the core inflation front, BBH observed that “trimmed mean CPI matched consensus at 3.6% y/y up from 3.5% in August.” They also underscored that “the policy-relevant Q3 trimmed mean CPI ran hot at 3.7% y/y (consensus: 3.6%) vs. 3.6% in Q2,” reinforcing concerns that underlying price pressures remain elevated from the RBA’s perspective.

Fed Tone Balanced as AI and Investment Come Into Focus

Fed Chair Warsh’s latest remarks registered a score of 5.6/10 on the FXS Speechtracker, slightly below the historical average of 6.1/10 and suggesting a cautious stance, even as he offered favorable comments on structural growth prospects and an investment upswing. His comment about being “over-scarred from the global financial crisis” highlighted ongoing risk-awareness that curbs excessive optimism, while repeated refusals to pre-commit regarding the October and December meetings kept the rate outlook intentionally uncertain, even as he drew attention to artificial intelligence and investment as important upside drivers.

Overall, the tone was described as balanced: supportive of continued expansion and productivity gains linked to AI, yet constrained by a focus on financial stability and tail risks that limited any fresh hawkish impulse for the US Dollar.

The FXS Fed Sentiment Index was unchanged, moving 0.00 points to 127.51, a still-elevated level that signaled the perceived policy stance remained firmly hawkish despite the absence of stronger tightening signals. The unaltered index, together with the slightly softer FXS Speechtracker score, implied that the Dollar’s existing hawkish premium persisted but was not meaningfully strengthened by Warsh’s appearance.

Key Data and Market-Implied Probabilities