AUD Weakens as RBA Cuts Rate Hike Expectations Amid Soft Inflation Report

The Australian Dollar weakened this week due to reduced expectations of an interest rate hike by the Reserve Bank of Australia (RBA). The AUD/JPY cross declined to around 113.65 during the early European session on Thursday, with the pair currently trading 0.65% lower on the week.

Market pricing for an August rate hike fell from nearly 21% down to about 3% to 4% following the Australian inflation report, which showed headline CPI inflation eased to 3.8% YoY in June from 4.0% in May, softer than market expectations of 4.0%.

Analysts polled by Reuters expect the Japanese central bank to raise rates to 1.25% by end-December and possibly as early as October, but the Bank of Japan (BoJ) is widely expected to keep its interest rate steady at 1.0% at its July policy meeting on Friday.

The RBA has been comforted by Australia's inflation undershooting core forecast, with TD Securities noting that 'Australia Q2/June CPI was lower than expected, which should reassure RBA officials that inflation pressures are kept in check.'