RBA Assistant Governor Sarah Hunter cautioned that interest rates could increase further as a result of ongoing inflationary pressures. The CME FedWatch Tool indicates that the markets are pricing in a 90.6% probability that the Federal Reserve will maintain current interest rates in October. Traders are closely observing developments in the Middle East, particularly the tensions between the US and Iran, as well as the Houthi attacks in Saudi Arabia. AUD/USD has experienced a depreciation following modest gains recorded in the previous trading day, currently trading around 0.7030 during the Asian hours on Monday. However, the downside of the currency pair could be restrained as the Australian Dollar may receive support following warnings from Reserve Bank of Australia Assistant Governor Sarah Hunter.
Speaking on Sunday, Hunter warned that interest rates might have to increase further because of persistent inflation and the potential for international price pressures to become ingrained in the economy. Her remarks reinforced expectations of a restrictive monetary stance following four rate hikes earlier this year. Market attention is now directed toward the upcoming September inflation data set to be released later this week, particularly in light of the August CPI figures that exceeded the RBA’s target range of 2% to 3%. Furthermore, any renewed escalation in the US-Iran conflict that drives up crude oil prices would exacerbate the RBA’s concerns regarding second-round inflation effects, thereby increasing the likelihood of further policy tightening beyond November.
Commerzbank’s Norman Liebke flags a worrying shift in domestic inflation psychology, noting that survey evidence now shows “a growing share of businesses believe that inflation of 3-3.5% is ‘the new normal’.” He argues that this is problematic for the RBA’s inflation-targeting framework, given the “long-term inflation target of 2-3%,” and underscores that the risk is not merely theoretical: “trimmed-mean inflation most recently stood at 3.6%, further above the target range.” In his view, this combination of elevated core inflation and drifting expectations reinforces the challenge facing policymakers as markets increasingly price in the prospect of further RBA tightening. Market participants have shifted their focus to the impending policy decision from the Federal Reserve. The Fed is anticipated to maintain interest rates at their current level prior to possibly considering an additional rate increase in December. According to the CME FedWatch Tool, markets are currently pricing in a 90.6% probability of a rate pause at the October 27–28 policy meeting, alongside a 79.7% chance of a hike in December.
Meanwhile, market participants continue to monitor ongoing geopolitical developments in the Middle East. US President Donald Trump ruled out immediate military action against Iran, stating, “there will not be a strike today,” according to reports. This followed earlier remarks where Trump suggested Washington might need to “finish the job” or potentially reach a deal with Tehran amidst growing Iranian and Houthi threats against American interests in the region. In a development that exacerbates regional tensions, Yemen’s Houthis announced on Sunday their intention to persist in targeting King Khalid Airport in Riyadh, according to a report by Reuters. This announcement arrived merely hours following statements from Saudi officials indicating that airport flights had recommenced, notwithstanding the ongoing assaults by the group.
