AUD/USD sinks as softer inflation unwinds RBA hike bets

• Headline and trimmed mean inflation modestly undershoot expectations
• November RBA hike probability slumps from 44% to 20%
• AUD/USD tests 0.6964 as downside momentum remains dominant
• ASX 200 breaks higher as hawkish rate pricing unwinds

Australia’s August inflation report has undershot expectations, adding to the unwind in hawkish RBA pricing that began after Governor Michele Bullock’s press conference following the bank’s interest rate decision on Tuesday.

ASX 200 and Australian three-year bond futures have broken higher, while AUD/USD has resumed its unwind to test a key support zone.

Inflation miss adds to RBA pricing unwind

On the August inflation figures themselves, there was a modest undershoot in both headline and trimmed mean inflation, the latter important given it 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 with expectations for 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.

Source: ABS

Looking at the unrounded index, though, the monthly trimmed mean increase was a relatively high 0.24%, while the annual rate was 3.57%. So while there was a modest undershoot, it was still basically in line with both the prior month and what markets had been looking for.

While the year-on-year rate appears to be rolling over, fitting with the view expressed by Bullock yesterday that policy settings are now restrictive, the nearer-term inflation pulse still leaves plenty of room for caution. Trimmed mean inflation is running at a 4.12% annualised pace over three months and 3.94% over six months, keeping the prospect of additional rate hikes firmly on the table.

However, the market is showing a clear inclination to jump on even the smallest dovish signal after what had been a very significant hawkish move in RBA pricing, and that's exactly what we've seen following the inflation report. 

The implied probability for a 25 basis point hike at the RBA’s next meeting on November 3 now sits at just 20%, down from 44% last week. 

Source: TradingView

Domestic inflation detail looks softer

Looking at the underlying detail in the August report, there was a clear trend within the data, with tradable inflation, which largely reflects global rather than domestic factors, rising 1.3% to be 2.9% higher than a year earlier.

In contrast, domestically derived categories were soft. Non-tradables were flat on the month, although still up 4.5% on a year earlier. Goods, largely reflecting higher energy prices, surged 1% to be 4.2% higher, but services, which often have linkages to wage pressures, and discretionary categories both declined 0.2%.

Source: ABS

While one month is not enough to create a trend, it fits with the view that high inflation, tighter monetary policy and recent declines in house prices across the country may be combining to curtail consumer demand.

That was also evident in a separate report released on Tuesday ahead of the RBA decision, which showed household spending was flat in August.

Rates unwind drives bullish breakout in threes

Source: TradingView

With front-end RBA hawkish pricing unwinding rapidly, Australian three-year government bond futures have staged a bullish breakout, successfully pushing above resistance at 95.035 that had capped bounces earlier this month.

With RSI (14) shifting back into neutral territory and MACD staging a bullish crossover while remaining in negative territory,  evidence is accumulating that we may have seen the lows for threes, at least in the near term.

If that is the case, 95.16, which was a breakdown level earlier this month, and 95.26 are the immediate overhead levels to watch.

If we were to see a reversal of the move, which at this stage appears unlikely, 94.875 is where the price bounced on two separate occasions earlier this month.

AUD/USD sinks to its lowest since July

Source: TradingView

The move in front-end rates has seen the modest corrective bounce in AUD/USD overnight reverse and then some, sending the pair to its lowest level since late July on the back of the inflation data.

The price is now 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.

On the topside, 0.7004 is the immediate focal point from where the pair now trades. Unless the price can reclaim that level, the bias remains towards further downside.

A sustained break beneath the Fib level would point to the potential for an unwind back towards support at 0.6920. Below that, there’s not a lot to speak of until 0.6865, the swing low set in June this year.

The message from the oscillators continues to favour selling into strength and downside breaks, with RSI (14) struggling to recover from oversold territory, while MACD remains deeply negative after crossing the signal line from above.

AUD/USD just looks heavy on the charts.

ASX 200 loves the rates unwind

Source: TradingView

While the Aussie dollar is struggling with the unwind in hawkish pricing, Australia’s ASX 200 is loving it, breaking to its highest level in more than a week after clearing downtrend resistance drawn from the highs set in August.

With the breakout now in place and the oscillators indicating that upside strength is rebuilding on the four-hourly timeframe, buying dips and bullish breaks is favoured in the near term.

8710 had been the top of the prevailing sideways range the index was trading in prior to the RBA, so it looms as a level of interest underneath where the index now trades, along with 8750, where the price stalled in overnight trade.

Overhead, 8810 has acted as resistance on multiple occasions this month, with 8840 and 8890 the other nearby levels of note.