AUD Surges as Hot CPI Fuels RBA Rate Hike Bets

The Australian dollar is on track to mark its longest weekly winning streak against the US dollar since 2021, following a hotter-than-expected inflation report that has prompted traders to price in a higher peak for the Reserve Bank of Australia's (RBA) cash rate.

According to data released on Wednesday, Australia's consumer price index (CPI) rose 3.6% year-on-year in the first quarter, exceeding market forecasts of 3.4%. This stronger inflation print has shifted expectations for the RBA's next policy move, with the chance of a 25-basis-point hike at the June meeting rising to 50%, up from 20% before the CPI release.

The RBA has repeatedly stated that it remains data-dependent, and this latest inflation figure complicates its path toward returning inflation to the 2-3% target band. Core inflation, which excludes volatile items, also came in above expectations, rising 4.0% year-on-year, indicating that underlying price pressures remain sticky.

The Australian dollar's rally is not solely a function of domestic data, as the US dollar has weakened in recent weeks due to the Federal Reserve signaling a potential shift toward rate cuts later this year. This divergence in monetary policy expectations has made the AUD more attractive to yield-seeking investors.