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- AUD/USD holds strong on rising RBA rate hike expectations despite weak capital expenditure data.
- Hotter July inflation prompted major banks to forecast an RBA cash rate increase to 4.6% soon.
- A firm US Dollar, backed by solid PCE inflation data, caps upside potential for the pair.
AUD/USD extends its gains for the third successive day, trading around 0.7180 during the Asian hours on Thursday. The pair continues to trade with a bullish bias as the Australian Dollar (AUD) maintains its strength, showing resilience despite domestic Private Capital Expenditure falling 3.6% in the second quarter, sharply missing expectations of a flat reading after a previous 6.5% gain.
This underlying AUD strength is primarily driven by heightened expectations of an upcoming Reserve Bank of Australia (RBA) interest rate hike, catalyzed by a hotter-than-expected July inflation report that signaled persistent price pressures. These elevated inflation figures have forced major financial institutions to revise their RBA rate path forecasts upward.
National Australia Bank (NAB) now anticipates a rate increase to 4.6% at the September meeting, whereas Commonwealth Bank and ANZ project a move in November while acknowledging the distinct risk of an earlier action. Although the RBA held its cash rate steady at 4.35% in August following three previous hikes, policymakers explicitly warned that further monetary tightening remains on the table if inflationary risks escalate.
Australia leading index points to a soft, not weak, growth backdrop
BNY Mellon’s Geoff Yu notes that Australia’s Westpac–Melbourne Institute Leading Index showed a modest improvement in July, with the six‑month annualised growth rate rising to “-0.2% from -0.4% in June.” He points out that the index “remains below trend for a seventh straight month,” but stresses that the signal is now “only marginally negative,” indicating an economy that is “soft rather than outright weak.” This nuanced reading of the data reinforces the view that underlying momentum has cooled without tipping into clear-cut weakness.
However, upside potential for the pair may be capped by steady performance from the US Dollar (USD). Stronger-than-expected US economic data has reinforced market expectations that the Federal Reserve (Fed) will implement another interest rate hike before the year concludes. July’s PCE price index accelerated to 0.2% month-on-month, beating the 0.1% forecast, while the annual rate ticked up to 3.7%. Investors are now turning their focus to Fed leadership for clearer policy cues at the upcoming Jackson Hole symposium.
