Australian Dollar Bid as CPI Beat Opens the Door for a Rate Hike

June 26, 2024 - Written by David Woodsmith

STORY LINK Australian Dollar Bid as CPI Beat Opens the Door for a Rate Hike

Inflation has risen steadily from a February low of 3.4% and will be a major concern for the RBA.

Markets have priced in a 50% probability of a rate hike by September and this has boosted the Australian Dollar.

‘Risk off’ is the theme on Wednesday as stock markets in Europe and the US drift lower by around –0.3% ahead of the US open. Meanwhile, the US dollar is bid and both EURUSD and GBPUSD are both down –0.45%.

Notably, the Australian Dollar has held up against the USD and is higher against other G7 currencies. This follows on from a high inflation reading which should ensure the RBA stay hawkish and may even lead to a rate hike.

CPI Beat Boosts the Aussie

The Monthly CPI Indicator was expected to come in at 3.8%, but beat expectations with a reading of 4.0%. Compared to the likes of the UK, where CPI just dropped to the BoE’s 2% target, this release will be a major concern. Indeed, inflation is going in the wrong direction as the 4.0% reading for May is up from 3.6% in April, which was higher than the 3.5% registered in March. From December 2023 to February 2024 CPI was just 3.4% so the trend appears to have turned higher and the RBA will be wondering what to do. Some analysts are speculating they may now hike.

“Everything now hangs on the June inflation print, just days before the Reserve Bank of Australia’s (RBA) 6 August rate meeting. We need to see inflation dropping then, or we may be facing another rate hike,” note ING.

There is some optimism that this rise is just a bump in the road, similar to what happened in the US earlier this year. Westpac point out the individual components in the CPI release were volatile and cost of living measures are soon due to start and should limit inflationary pressures.

“Electricity prices, transportation and communication came in softer than expected. This was offset by food and alcohol & tobacco. Recently announced cost of living measures will kick in from 1 July, which will help reduce measured inflation.”

Will it be enough? We can’t ignore the “bump” in the disinflationary trend is coming from a higher starting point from the US and CPI at 4% cannot be ignored for long. Another hot CPI print in June would strongly suggest the RBA’s policies are not working and this may relate to the hiking cycle stopping at just 4.3%, much lower than the rates set by the Fed, BoE and BoC. The simple solution would therefore be to hike further.

Markets have priced in around a 50% probability of a hike by September, which has boosted the Australian Dollar. With the prospect of hikes, and at the very least a sustained pause and no cuts, the Aussie may finally catch a sustained bid. It seems particularly attractive against the likes of the euro which has political uncertainty and a dovish central bank weighing on it. The AUD may also firm against the pound which has stayed strong due to delays in rate cuts, but the probabilities of a BoE move in August are still high and BoE and RBA policies are likely to diverge into the end of this year.

The risk to a bullish view for the Aussie comes from a drop in the next inflation reading. With markets starting to price in hikes, any evidence the recent “bump” higher in inflation is temporary could get them to rapidly price them out again and this would weigh, at least in the short-term. One thing is for certain, though – the RBA is a long way from cutting.

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TAGS: Australian Dollar Forecasts