AUD Weakens as Softer Inflation Eases Rate Hike Pressure

Australia's Reserve Bank (RBA) may not be as eager to hike interest rates as previously thought, thanks in part to softer-than-expected inflation numbers. The Australian Dollar has seen a decline after the release of the latest Consumer Price Index (CPI), which showed core inflation undershot the RBA's May forecasts.

This lower starting point for inflation reduces pressure for additional rate hikes, with market-implied odds now close to 50:50 for one final move later in 2026. Lee Hardman from MUFG notes that core inflation surprised to the downside for the second consecutive quarter in Q2, increasing by 0.8%Q/Q and an annual rate of 3.6%.

The Australian Dollar has been a beneficiary of AI-related demand, but its recent weakness is largely attributed to the softer CPI release. This development provides RBA policymakers with a better starting point for their updated economic forecasts, which helps ease pressure to hike rates further.