AUD Weaks as US Dollar Strengthens Ahead of Inflation Data

The Australian Dollar (AUD) weakened on Wednesday, trading around 0.7060 after giving back prior-day gains as the US Dollar firmed ahead of key inflation data.

The market-implied probability of a 25-basis-point Fed hike in September slipped to nearly 48%, down from 52% the previous day, according to the CME FedWatch Tool.

Major banks diverge on the Australian policy outlook, with MUFG warning that escalating energy prices could spark a global inflation shock and push the RBA to raise rates as early as September. By contrast, NAB assesses current policy settings as sufficiently restrictive and expects the RBA to keep rates unchanged through 2026, followed by cuts beginning in mid-2027.

The RBA's tightening expectations come as Australian economic momentum shows signs of cooling, with financial conditions having tightened, consumer spending slowing gradually, housing momentum softening, and labor market conditions easing a little more than expected. However, the RBA still describes its policy stance as somewhat restrictive and projects inflation will only return to the midpoint of its target by late 2027.