AUD/USD Sinks as Inflation Data Unwinds RBA Hike Bets

Australia's inflation report for August has caused significant changes in market expectations. The modest undershoot of both headline and trimmed mean inflation added to the unwind in hawkish Reserve Bank of Australia (RBA) pricing that began after Governor Michele Bullock's press conference following the bank's interest rate decision on Tuesday.

The August inflation figures showed a 0.4% increase for the month and a 4.0% annual rise, compared to expectations of 0.5% and 4.1%, respectively. Trimmed mean inflation, the RBA's preferred measure, rose 0.24% monthly but remained at an annual rate of 3.57%. Despite the modest undershoot, trimmed mean inflation is running at a 4.12% annualised pace over three months and 3.94% over six months.

The market has responded rapidly to the inflation data, with the implied probability for a 25 basis point hike at the RBA's next meeting on November 3 now sitting at just 20%, down from 44% last week. The AUD/USD pair has also resumed its unwind, testing key support at 0.6964. In contrast, Australia's ASX 200 index has broken higher, taking advantage of the unwinding hawkish rate pricing.