RBA Hike Bets Plummet as Inflation Report Brings Down Hawkish Sentiment

The release of Australia's August inflation report has caused a significant shift in market expectations regarding a potential interest rate hike by the Reserve Bank of Australia (RBA). The data showed a modest undershoot in both headline and trimmed mean inflation, which is the RBA's preferred measure of underlying price pressures.

Headline CPI rose 0.4% for the month and 4.0% over the year compared to expectations of 0.5% and 4.1%, respectively. Trimmed mean rose 0.2% against 0.3% expected, while the annual rate came in at 3.6%, unchanged from July and in line with expectations.

While the RBA's preferred measure of inflation is still above its target range of 2-3%, the near-term inflation pulse leaves room for caution, keeping the prospect of additional rate hikes on the table. However, market sentiment has swung decisively towards a dovish view, with the implied probability for a 25 basis point hike at the RBA's next meeting on November 3 now sitting at just 20%, down from 44% last week.

The unwinding of hawkish rate pricing has had a significant impact on the Australian dollar (AUD), which has sunk to its lowest level since late July. The AUD/USD pair is currently testing a key support zone, comprising horizontal support at 0.6964 and the 23.6% Fib retracement of the April 2025 to June 2026 bull move.