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The Australian dollar is supported by a hawkish turn from the Reserve Bank of Australia's Deputy Governor, with next week's inflation figures now set to decide whether a November rate hike lands.
The Australian dollar is back above 70 US cents after Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser said Australia's inflation outlook is "materially worse" than the central bank's staff forecast in August.
Higher inflation raises the odds of another increase in the cash rate by the central bank, and a higher cash rate lifts the returns on Australian assets, drawing in the foreign capital that supports the currency.
Markets now price a 56% chance of a 25 basis point hike at the RBA's 3 November meeting, up from 24% before Hauser spoke.
The repricing reverses the damage done by last week's surprise fall in employment, which had all but priced out a November move and keeps a lid on the Pound to Australian Dollar rate.
"If Hauser's aim was to reset expectations to a coin toss, he succeeded," says Joseph Capurso, a strategist at Commonwealth Bank of Australia.
Hauser Points to AI, Data Centres and Oil
Hauser said third-quarter inflation will likely come in higher than expected, pointing to rising prices for AI-related technology, data centre construction and oil.
The remarks build on hawkish minutes from the RBA's September meeting, which showed the Board prepared to accept slower growth and weaker employment to bring inflation down.
"We continue to expect a 25bp rate increase in November, with next Wednesday's Q3 CPI crucial to the decision and the AUD," says ANZ in its AUD Midweek Highlights note.
Westpac expects trimmed mean inflation, the RBA's preferred gauge of underlying price pressures, to rise 0.9% in the third quarter, up from 0.8% in the second.
In a recent update, Westpac also raised its December quarter inflation forecast, citing a surge in fuel prices and "signs of increase pass-through," which it says highlights "inflation momentum meaningfully above the RBA's current expectations."
"In our opinion, the door to more tightening by the RBA is still open given the bigger picture forces at play (i.e. the elevated level of demand across the economy, Australia's lackluster productivity, and sticky inflation)," says Corpay in a recent update.
Corpay adds that bearish positioning in the Aussie leaves room for gains should the inflation data confirm the hawks' case.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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Talk to a specialistCBA Sees Only a Temporary Lift
Commonwealth Bank of Australia still expects the RBA to hold in November, and reads Hauser's remarks as consistent with the post-meeting statement, the minutes and "his typically hawkish messaging."
"Given persistently high Australian inflation and market pricing of a modest chance of a 25bp increase to the policy interest rate by year end, any hawkish comments will support AUD/USD, albeit temporarily in our view," says CBA in a note published ahead of the speech.
The labour market is the main argument for a hold. Westpac notes unemployment is already overshooting the RBA's August forecasts after September's 39,300 fall in employment.
RBA Assistant Governor Christopher Kent added on Monday that the Aussie is "marginally above the long-run equilibrium estimates," though he cautioned the models are very uncertain.
GBP/AUD Tests Its 1.90 Support Band
The Pound to Australian Dollar rate is at 1.9077, down 0.16% on the day, after dipping to 1.9031 and tagging the 100-day moving average at 1.9035.
Above: GBP/AUD daily chart, with the 100-day moving average in blue and the 21-day moving average in red. Image © Pound Sterling Live, chart created with TradingView.
The 21-day average has risen to 1.8996, so it now sits alongside the 100-day average and horizontal support at 1.9000, forming a support band between 1.9000 and 1.9035.
Our base case from Monday's forecast holds: we expect dips to hold this band, with a return above last week's high at 1.9228 needed to open the way to the July high at 1.9362.
CBA sees resistance in AUD/GBP at 0.5260, equivalent to 1.9011 in GBP/AUD terms, close to the bottom of that band.
The pound has its own support. Markets price about an 85% chance of a Bank of England hike in November after Tuesday's jobs report showed unemployment falling to 4.7%, and UK inflation figures for September land this morning.
Australia's third-quarter inflation figures and public comments from Governor Michele Bullock both land on 28 October, the last tests before the RBA meets.
A hot inflation print would confirm Hauser's warning and break GBP/AUD below 1.90, exposing the 14 October low at 1.8891. A soft one hands the advantage back to the pound and a retest of 1.9228.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
One specialist explains every step in plain English and stays with it until the money lands. FCA authorised, FRN 594433.
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