The RBA's dream of a rate cut is shattered! Inflation is skyrocketing, and the Australian dollar is rising strongly and launching a counterattack.
2025-09-24 14:58:15
Official data released on Wednesday (September 24) showed that Australia's consumer price index rose 3% year-on-year in August, the highest increase in a year, exceeding market expectations of 2.9% and hitting the upper limit of the Reserve Bank of Australia's 2-3% target range. Housing costs were the main contributor, driven by soaring electricity prices, while the year-on-year increase in the trimmed mean indicator slowed to 2.6%.
This result, along with recent tight labor market data, reinforces market expectations that the Reserve Bank of Australia may keep interest rates unchanged at its September 30 meeting and postpone the timetable for rate cuts. The interest rate swap market shows that the probability of a rate cut in November has fallen to 55%.
Following the data release, the Australian dollar/US dollar exchange rate rose significantly, rising as much as 0.45% to 0.6627 and currently trading around 0.6615. The yield on policy-sensitive three-year Treasury bonds also climbed. The market significantly reduced its bets on a near-term rate cut by the Reserve Bank of Australia (RBA). As a result, Barrenjoey Markets economist Jo Masters' team withdrew their forecast for a November rate cut, noting that "inflationary pressures are reaccelerating across the board."
"There is significant uncertainty about the path of interest rate cuts, and we anticipate a 25 basis point cut in the first half of 2026, but the timing remains to be seen," Masters said.
The US dollar index rose slightly on Wednesday. However, the release of the US S&P Global PMI data for September on Tuesday put pressure on the dollar.
The S&P Global Composite Purchasing Managers' Index (PMI) for the US fell slightly to 53.6 in September from 54.6 in August, suggesting that private sector growth momentum may struggle to gain further momentum. The manufacturing PMI fell to 52.0 from 53.0, indicating weakening momentum in the sector, while the services PMI fell to 53.9 from 54.5, suggesting that demand may be slowing.
Federal Reserve Chairman Powell said on Tuesday that labor market weakness has outweighed concerns about sticky inflation, prompting the Fed to cut interest rates at its September meeting last week. However, he also stressed that he is satisfied with the current policy path, but if the Federal Open Market Committee believes further easing is needed, there is still the possibility of further rate cuts.
Cleveland Fed President Beth Hammack warned on Monday that inflationary pressures are likely to persist in the short term, noting that the Fed faces challenges in its dual mandate of controlling inflation and supporting the labor market. Richmond Fed President Thomas Barkin also noted that tariffs often lead to higher prices for consumers, and emphasized that businesses' primary concern currently remains ambiguous trade policies, not high interest rates.
The daily chart shows that AUD/USD has touched the lower boundary of its ascending channel, indicating a pick-up in bullish momentum. The 14-day relative strength index (RSI) remains above 50, suggesting that bullish sentiment remains.
On the upside, AUD/USD is testing the lower boundary of its recent ascending channel near 0.6625. If the price breaks back into the channel, it will consolidate the short-term upward momentum and push the exchange rate towards the 11-month high of 0.6707 set on September 17, and then challenge the upper boundary of the channel near 0.6730.
On the downside, AUD/USD faces initial support at the key psychological level of 0.6600, with further support coinciding with the 50-day exponential moving average (EMA) at 0.6552. A break below this support level would weaken medium-term upward momentum and could lead to a test of the three-month low of 0.6414 reached on August 21.
(AUD/USD daily chart, source: Yihuitong)
Reserve Bank of Australia Governor Bloke recently emphasized that policy adjustments will be based on "economic evidence that is consistent with or stronger than expected." Although she acknowledged that monthly CPI volatility is large, two consecutive months of strong data have reduced the urgency of interest rate cuts.
Rodrigo Catril, a strategist at National Australia Bank, said: "The details of housing and services inflation still pose upside risks. Today's data provides a basis for the Reserve Bank of Australia to pause its interest rate cuts in November."
Starting November 26, the Australian Bureau of Statistics will publish a full monthly inflation indicator, filling a long-standing data gap and bringing the country into line with the statistical standards of most developed economies. However, during the transition period, quarterly data will remain the core policy reference benchmark.
At 14:57 Beijing time, AUD/USD was trading at 0.6615/16.
This result, along with recent tight labor market data, reinforces market expectations that the Reserve Bank of Australia may keep interest rates unchanged at its September 30 meeting and postpone the timetable for rate cuts. The interest rate swap market shows that the probability of a rate cut in November has fallen to 55%.
Immediate market reaction: Australian dollar and government bond yields both rise
Following the data release, the Australian dollar/US dollar exchange rate rose significantly, rising as much as 0.45% to 0.6627 and currently trading around 0.6615. The yield on policy-sensitive three-year Treasury bonds also climbed. The market significantly reduced its bets on a near-term rate cut by the Reserve Bank of Australia (RBA). As a result, Barrenjoey Markets economist Jo Masters' team withdrew their forecast for a November rate cut, noting that "inflationary pressures are reaccelerating across the board."
"There is significant uncertainty about the path of interest rate cuts, and we anticipate a 25 basis point cut in the first half of 2026, but the timing remains to be seen," Masters said.
AUD/USD Analysis: Aussie extends gains despite steady dollar
The US dollar index rose slightly on Wednesday. However, the release of the US S&P Global PMI data for September on Tuesday put pressure on the dollar.
The S&P Global Composite Purchasing Managers' Index (PMI) for the US fell slightly to 53.6 in September from 54.6 in August, suggesting that private sector growth momentum may struggle to gain further momentum. The manufacturing PMI fell to 52.0 from 53.0, indicating weakening momentum in the sector, while the services PMI fell to 53.9 from 54.5, suggesting that demand may be slowing.
Federal Reserve Chairman Powell said on Tuesday that labor market weakness has outweighed concerns about sticky inflation, prompting the Fed to cut interest rates at its September meeting last week. However, he also stressed that he is satisfied with the current policy path, but if the Federal Open Market Committee believes further easing is needed, there is still the possibility of further rate cuts.
Cleveland Fed President Beth Hammack warned on Monday that inflationary pressures are likely to persist in the short term, noting that the Fed faces challenges in its dual mandate of controlling inflation and supporting the labor market. Richmond Fed President Thomas Barkin also noted that tariffs often lead to higher prices for consumers, and emphasized that businesses' primary concern currently remains ambiguous trade policies, not high interest rates.
Technical Analysis
The daily chart shows that AUD/USD has touched the lower boundary of its ascending channel, indicating a pick-up in bullish momentum. The 14-day relative strength index (RSI) remains above 50, suggesting that bullish sentiment remains.
On the upside, AUD/USD is testing the lower boundary of its recent ascending channel near 0.6625. If the price breaks back into the channel, it will consolidate the short-term upward momentum and push the exchange rate towards the 11-month high of 0.6707 set on September 17, and then challenge the upper boundary of the channel near 0.6730.
On the downside, AUD/USD faces initial support at the key psychological level of 0.6600, with further support coinciding with the 50-day exponential moving average (EMA) at 0.6552. A break below this support level would weaken medium-term upward momentum and could lead to a test of the three-month low of 0.6414 reached on August 21.
(AUD/USD daily chart, source: Yihuitong)
Monthly inflation indicators will be fully implemented
Reserve Bank of Australia Governor Bloke recently emphasized that policy adjustments will be based on "economic evidence that is consistent with or stronger than expected." Although she acknowledged that monthly CPI volatility is large, two consecutive months of strong data have reduced the urgency of interest rate cuts.
Rodrigo Catril, a strategist at National Australia Bank, said: "The details of housing and services inflation still pose upside risks. Today's data provides a basis for the Reserve Bank of Australia to pause its interest rate cuts in November."
Starting November 26, the Australian Bureau of Statistics will publish a full monthly inflation indicator, filling a long-standing data gap and bringing the country into line with the statistical standards of most developed economies. However, during the transition period, quarterly data will remain the core policy reference benchmark.
At 14:57 Beijing time, AUD/USD was trading at 0.6615/16.
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