RBA’s Kent observed that rate hikes are having an effect, although additional increases could be on the table should new risks arise. Softer US PPI inflation data has tempered expectations for Fed rate hikes, thereby bolstering the AUD/USD pair. Markets have adjusted the likelihood of a September Fed rate hike to 34.8% in light of disappointing inflation data. AUD/USD declines for the third consecutive day, hovering near 0.7060 during the Asian trading session on Friday. Reserve Bank of Australia Assistant Governor Chris Kent indicated on Thursday that the recent increases in interest rates are achieving their desired outcomes. However, Kent cautioned that further rate increases remain a possibility should new inflationary risks emerge.
Analysts emphasise that the RBA’s previous rate hikes are now evidently impacting the real economy, observing that “higher borrowing costs, rising mortgage payments, weaker established housing market conditions and a stronger Australian dollar have all tightened financial conditions, while aggregate demand is slowing as intended to help return inflation to target.” This combination of softer housing activity and currency strength aligns with a monetary stance that is currently somewhat restrictive and aims to guide inflation back toward the RBA’s target band. Despite potential pressure on the Australian Dollar, the downside for the AUD/USD pair may be limited due to a weakening US Dollar following a softer-than-expected US inflation report.
Market focus is currently directed toward the US July Retail Sales data, which is set to be released later on Friday. In the context of inflation, the Bureau of Labour Statistics indicated that US wholesale costs for goods and services remained unchanged in July, reflecting a cooling trend compared to the expected 0.2% increase, following a revised 0.1% decrease in June. Excluding the more volatile food and energy components, the core Producer Price Index experienced an increase of 0.2%, which is marginally below the market consensus expectation of 0.3%.
On an annual basis, headline PPI rose by 4.7% year-over-year in July, whereas core PPI experienced an increase of 4.2% during the same timeframe. These cooling inflation metrics have altered expectations concerning Federal Reserve policy. According to the CME FedWatch Tool, markets are currently assigning a 34.8% probability to a U.S. rate hike at the forthcoming September meeting, a decrease from the 40% observed immediately after the PPI data release.
