Commerzbank’s Volkmar Baur notes that weaker-than-expected Australian inflation has sharply reduced market-implied odds of an August RBA rate hike and pushed the AUD lower. While services and non-tradable inflation remain elevated, he expects rates to stay unchanged in August and sees no further hikes this year, implying continued pressure on the Australian Dollar as Oil price volatility complicates the outlook.

Lower CPI reduces RBA hike odds

"With two weeks to go before the Reserve Bank of Australia’s next monetary policy meeting, signs of a pause are mounting. In June, prices surprisingly fell by 0.1% month-over-month, while, according to Bloomberg, the consensus had expected a 0.2% increase. As a result, the year-over-year rate fell to 3.8%, reaching its lowest level in four months."

"In light of this development, the market significantly adjusted its expectations for the next meeting this morning. While an interest rate hike on August 11 was still expected yesterday with a probability of over 20% (on Monday, it was as high as 30%), such a decision is now seen as having only a 4% probability. As a result, the AUD also weakened this morning."

"The inflation report does indeed reveal some weaknesses in the details. For instance, inflation in the services sector continues to rise too quickly, and prices for non-tradable goods are also showing an unwelcome surge."

"Overall, however, we also believe that interest rates in Australia will remain unchanged in August. As the year progresses, the development of oil prices will certainly also play a key role."

"Last week alone made it clear once again just how opaque the situation is and how volatile oil prices are. Overall, however, we do not expect any further interest rate hikes for the rest of the year. The AUD is therefore likely to remain under pressure from this direction."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)