Australian Dollar Loses Momentum as Reserve Bank Pauses Tightening Cycle
The Australian dollar's rally is losing steam due to the Reserve Bank of Australia's decision to pause its monetary tightening cycle after three consecutive cash rate hikes. The RBA is expected to leave the cash rate unchanged at its August 11 meeting, as inflation slows down but remains above the upper end of its 2-3% target range.
The AUD/USD pair was supported by rallying US equity markets and a stronger Chinese yuan between January and May, but the latest PMI data suggest that China's economy will continue to expand at a slower pace. The direction of the AUD/USD depends on upcoming US labor market and inflation data, with weak employment figures strengthening the case for buying the pair with a target near 0.7300.
The RBA Governor Michele Bullock has emphasized that inflation remains too high and could accelerate again due to developments in the Middle East. While some analysts believe further moderation in domestic demand may be required to return inflation to the target range, others argue that inflation remains persistent enough to preserve the Reserve Bank's hawkish bias.
Derivatives traders have lowered the probability of additional monetary tightening in 2026 from 90% to 60%, following the release of June's inflation data. Consumer inflation slowed to 3.8%, below Bloomberg's forecast of 4.0%, while core inflation eased to 3.6% versus expectations of 3.7%.