Key Moments
- AUD/USD trades near 0.7035 in Friday’s Asian session as the Australian Dollar extends gains against the US Dollar.
- Australia’s September CPI accelerated to 4.3% YoY, exceeding both August’s 4.0% reading and the 4.2% consensus, sharply lifting RBA rate hike probabilities.
- The Federal Reserve kept its policy rate unchanged at 3.75% to 4.00%, but hawkish signals and tools-based metrics indicate markets are still pricing further tightening.
Australian CPI Upside Surprise Lifts AUD and RBA Hike Odds
AUD/USD is advancing toward 0.7035 during Asian trading on Friday, with the Australian Dollar edging higher against the US Dollar as investors respond to stronger-than-expected domestic inflation and increasingly hawkish expectations for the Reserve Bank of Australia (RBA).
Data from the Australian Bureau of Statistics on Wednesday showed that the Consumer Price Index (CPI) rose 4.3% year-on-year in September, up from 4.0% in August and above the consensus estimate of 4.2%. RBA Governor Michele Bullock said that the price pressures the RBA had been worried about were starting to emerge.
The inflation surprise has reinforced expectations that the RBA will tighten policy at its meeting next Tuesday, providing support for the Aussie. According to the ASX RBA Rate Tracker, markets are now assigning nearly an 80% probability that the cash rate will be lifted to 4.85% at the upcoming Board meeting, compared with 62% before the CPI release.
Fed Holds Rates Steady as Markets Look Ahead to December
On Wednesday, the US Federal Reserve left the federal funds target range unchanged at 3.75% to 4.00%. Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented, favoring a 25 basis point rate increase instead.
Policymakers indicated that they are looking to incoming data to guide their next move. According to the CME FedWatch tool, traders are currently pricing in a 74.9% probability of a rate hike in December.
Strategists See Australian Inflation Forcing RBA’s Hand
Strategists at Brown Brothers Harriman (BBH) noted that the latest inflation figures in Australia “beat expectations, strengthening the case for another RBA hike and underpinning AUD.” They highlighted that September headline CPI rose “4.3% y/y (consensus: 4.2%) vs. 4.0% in August reflecting rising housing and transport costs,” indicating price pressures are running hotter than the central bank had previously anticipated.
BBH underscored 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%.” In their assessment, “this argues for additional tightening,” with RBA cash rate futures having “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 core inflation, BBH pointed out that “trimmed mean CPI matched consensus at 3.6% y/y up from 3.5% in August.” They added that, for policy purposes, “the policy-relevant Q3 trimmed mean CPI ran hot at 3.7% y/y (consensus: 3.6%) vs. 3.6% in Q2,” reinforcing the view that underlying inflation remains uncomfortably high for the RBA.
Warsh’s Inflation Message Supports Dollar Sentiment
Warsh’s press conference tone is described as firmly in line with the established policy baseline, with the FXS Speechtracker score at 7/10, matching its historical average and signaling a consistently hawkish stance. The key comment that “ensuring price stability is not about a fixed date on a calendar” underscores a data-dependent, outcome-focused strategy. Repeated references to “new monetary medicine,” the removal of accommodation, and confidence in inflation expectations emphasize an ongoing determination to contain inflation rather than signaling a swift pivot. The strong emphasis on a strict 2% PCE target, dismissal of a “soft” inflation objective, and recognition that higher interest rates are tightening financial conditions and affecting new technology and CAPEX underpin a narrative of steady policy resolve that tends to support the Dollar.
The FXS Fed Sentiment Index rose by +14.39 points to 141.89, pushing sentiment deeper into hawkish territory and aligning with the unchanged 7/10 FXS Speechtracker score. With the index well above the neutral 100 level, the combination of a firm 2% price stability commitment and the acknowledgment that “monetary medicine is starting to work” suggests markets are likely to keep pricing a relatively restrictive Fed path, a backdrop that generally favors the Dollar against the Euro and Yen.
Key Policy and Market Metrics
| Indicator / Rate | Latest Reading / Level | Previous / Reference | Consensus (if stated) |
|---|---|---|---|
| AUD/USD spot (Friday Asian session) | Near 0.7035 | – | – |
| Australia headline CPI (September, YoY) | 4.3% | 4.0% (August) | 4.2% |
| Australia trimmed mean CPI (YoY) | 3.6% | 3.5% (August) | 3.6% |
| Q3 trimmed mean CPI (YoY) | 3.7% | 3.6% (Q2) | 3.6% |
| Market-implied odds of RBA hike to 4.85% | Nearly 80% | 62% before data release | – |
| Fed funds target range | 3.75% – 4.00% | – | – |
| Market-implied probability of Fed hike in December | 74.9% | – | – |
| FXS Speechtracker score (Warsh) | 7/10 | Historical average 7/10 | – |
| FXS Fed Sentiment Index | 141.89 | +14.39 change | Neutral line: 100 |
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