AUD Surges as Strong Inflation Data Boosts Rate Hike Bets

The Australian dollar reached its highest level in three months on Friday after stronger-than-expected inflation data changed expectations about the Reserve Bank of Australia's next interest rate decision.

The AUD/USD pair rose around 0.1% to $0.72, its strongest point since May 15, and was also poised for a 0.4% weekly gain, which would mark its fifth consecutive week of gains.

The increase in the Australian dollar came after inflation data showed that prices rose faster than economists had anticipated in July, with the monthly consumer price index increasing by 1.0% from June and annual inflation easing to 3.5% from 3.8% in June.

However, underlying inflation figures remained high, with the trimmed mean increasing by 0.5% during July and standing at 3.6% on an annual basis. Housing costs continued to be a major source of price pressure, rising 5.0% over the year.

The RBA's next interest rate decision is now seen as more likely to involve another rate hike, with markets increasing their expectations from around 17% before the data was released to roughly 38%. A higher interest rate can support a country's currency by making assets in that currency more attractive to investors.

Westpac analysts noted that while the strong July inflation report increased the possibility of a November rate increase, one data point is not enough to immediately lock in another hike.