Australian Dollar Gains on Hawkish Expectations Despite Prolonged Hold Outlook

The Australian Dollar has been gaining ground this week as hotter-than-expected inflation and strong household spending fuel hawkish expectations. According to ING's Francesco Pesole, the Reserve Bank of Australia is expected to hold its view despite the recent data, with a prolonged hold seen as more likely than another rate hike.

The inflation numbers for July were higher than anticipated, coming in at 3.5% headline and 3.6% trimmed mean. This has caused markets to price in a 28bp interest rate hike by year-end, up from around 13bp earlier in the week.

Despite this, ING's macro team still favours a prolonged hold by the RBA, citing benign inflation and a steady Federal Reserve as reasons for reduced urgency. They expect the inflation trajectory to remain benign, which should keep rates on hold.

The team also notes that house prices are declining and unemployment has edged higher, trends that will become clearer in the 2Q GDP data. The RBA is likely to wait for another set of quarterly numbers before making a decision on interest rates.