AUD/USD remains resilient amid increasing expectations for rate hikes from the RBA, even in the face of disappointing capital expenditure figures. Hotter July inflation has led major banks to predict an imminent increase in the RBA cash rate to 4.6%. A firm US Dollar, supported by robust PCE inflation data, limits the upside potential for the pair. AUD/USD continues to rise for the third day in a row, trading at 0.7180 on Thursday during Asian trading. The pair continues to trade with a bullish bias as the Australian Dollar maintains its strength, demonstrating resilience despite domestic Private Capital Expenditure falling 3.6% in the second quarter, sharply missing expectations of a flat reading after a previous 6.5% gain.
This underlying AUD strength is primarily driven by heightened expectations of an upcoming Reserve Bank of Australia interest rate hike, catalysed by a hotter-than-expected July inflation report that signalled persistent price pressures. These heightened inflation statistics have compelled significant financial entities to adjust their RBA rate trajectory predictions upward. National Australia Bank now anticipates a rate increase to 4.6% at the September meeting, whereas Commonwealth Bank and ANZ project a move in November while acknowledging the distinct risk of an earlier action. Despite maintaining its cash rate at 4.35% in August after three consecutive increases, the RBA has clearly indicated that additional monetary tightening could be considered should inflationary pressures intensify.
BNY Mellon’s Geoff Yu observes that Australia’s Westpac-Melbourne Institute Leading Index exhibited a slight enhancement in July, as the six‑month annualised growth rate increased to “-0.2% from -0.4% in June.” He notes that the index “remains below trend for a seventh straight month,” but emphasises that the signal is now “only marginally negative,” suggesting an economy that is “soft rather than outright weak.” This nuanced reading of the data reinforces the perspective that underlying momentum has cooled without tipping into clear-cut weakness.
Nonetheless, the upward potential for the pair could be limited by the consistent performance of the US Dollar. Stronger-than-expected US economic data has bolstered market expectations that the Federal Reserve will enact another interest rate increase before the year ends. In July, the PCE price index experienced a month-on-month increase of 0.2%, surpassing the anticipated 0.1%. Concurrently, the annual rate rose to 3.7%. Investors are now directing their attention toward the Federal Reserve leadership for more definitive policy signals at the forthcoming Jackson Hole symposium.
