AUD Declines Despite RBA Rate Hike Warning Amid Weakening USD

The Australian Dollar (AUD) declined despite a warning from the Reserve Bank of Australia (RBA) that further rate hikes remain on the table. RBA Assistant Governor Chris Kent stated that recent interest rate hikes are producing their intended effect, but also cautioned about new inflationary risks. Analysts at BNY Mellon note that the RBA's earlier rate hikes have now fed through to the real economy, resulting in higher borrowing costs and a stronger Australian Dollar.

However, a weakening US Dollar (USD) following a softer-than-expected US inflation report may limit the downside for the AUD/USD pair. Market attention is shifting towards the US July Retail Sales data scheduled for release later on Friday.

The cooling inflation metrics in the US have shifted expectations regarding Federal Reserve policy, with markets now pricing in a 34.8% probability of a U.S. rate hike at the upcoming September meeting, down from 40% immediately following the PPI data release.