The AUD/USD pair has weakened after seeing slight gains in the previous session, currently trading around 0.7030 during Asian trading hours on Monday. That said, the Australian Dollar (AUD) might find some support due to comments from Sarah Hunter, an Assistant Governor at the Reserve Bank of Australia (RBA), who issued warnings recently.
On Sunday, Hunter indicated that interest rates could rise further as inflation remains stubbornly high. She also noted that there’s a risk of external price pressures becoming a more permanent issue within the economy. Her statements have led to renewed expectations for a stringent monetary policy following the four rate hikes already implemented this year.
The market’s attention is now turning to the inflation data for September, set to be released later this week. This is particularly significant after the August CPI numbers surpassed the RBA’s target range of 2% to 3%. Additionally, if tensions in the US-Iran situation flare up again, causing crude oil prices to spike, it would exacerbate the RBA’s worries regarding inflation, raising the chances for more policy tightening past November.
RBA faces credibility test as inflation expectations drift above target
Norman Liebke from Commerzbank has raised concerns about a troubling shift in domestic inflation sentiment. He pointed out that surveys reveal more businesses now think inflation in the 3-3.5% range is becoming the norm. This is an issue for the RBA’s inflation-targeting approach, given their long-term goal of keeping inflation between 2% and 3%. Highlighting a more pressing concern, he noted that the trimmed-mean inflation recently clocked in at 3.6%, well above the target, which makes the challenge for policymakers even greater as the market increasingly anticipates further tightening from the RBA.
Traders are also awaiting the Federal Reserve’s policy decision. The Fed is generally expected to maintain current interest rates for now, with a potential rate hike in December. As for the probabilities, the CME FedWatch Tool indicates a 90.6% chance of no change during the upcoming meeting on October 27–28, alongside a 79.7% possibility for a rate increase in December.
Meanwhile, geopolitical developments in the Middle East remain on the radar of market participants. President Donald Trump stated there’s no immediate military action against Iran, emphasizing, “there will not be a strike today,” as reported by Al Jazeera. This comes after he suggested that the U.S. might need to “finish the job” or possibly negotiate with Iran amidst rising threats from Iranian and Houthi factions against U.S. interests in the region.
Furthermore, Yemen’s Houthis declared plans on Sunday to continue targeting Saudi Arabia’s King Khalid Airport in Riyadh, according to Reuters. This news follows earlier announcements from Saudi officials that airport operations had resumed in spite of ongoing attacks by the group.
