Australian Dollar gains on hawkish RBA outlook, Warsh speech in focus

The Australian Dollar (AUD) has strengthened against its major counterparts on Thursday, driven by expectations of a hawkish Reserve Bank of Australia (RBA) outlook following unexpectedly strong inflation data released on Wednesday. A weaker US Dollar (USD) further bolstered the AUD. As of the latest update, AUD/USD is trading near 0.7197, a level not seen since mid-May.

The recent inflation figures have increased the likelihood of an RBA rate hike as early as September. While the cash rate remains unchanged at 4.35% after three previous increases this year, the central bank emphasized that inflation may stay elevated for an extended period and highlighted risks on the upside, particularly due to higher oil prices following Middle East tensions.

According to Reuters, three of Australia's four largest banks now anticipate another RBA rate increase this year, with forecasts ranging from a 25-basis-point hike in September to November. Westpac maintains that rates will remain steady. On the US side, the latest PCE inflation data released on Wednesday did not shift expectations for the Federal Reserve's September meeting.

While headline PCE exceeded forecasts, traders paid more attention to the core reading, which was in line with expectations. The FedWatch Tool indicates a 62% probability that the Fed will keep rates unchanged in September. Consequently, the Greenback faces challenges in attracting significant buying interest despite hawkish remarks from Fed officials and remains in a holding pattern ahead of Fed Chair Kevin Warsh's speech at the Jackson Hole Symposium on Friday.

In the short term, differing RBA-Fed policy expectations are expected to keep the AUD supported. On Friday, traders will monitor preliminary Nonfarm Payrolls (NFP) revisions, University of Michigan Consumer Sentiment, Consumer Expectations, and inflation expectations data. The RBA sets monetary policy for Australia, aiming to maintain price stability (2-3% inflation) and promote economic prosperity.

The RBA primarily uses interest rate adjustments to achieve this goal, with higher rates strengthening the AUD. Modern macroeconomic data indicates that moderate inflation can support a currency's value as central banks may raise interest rates in response, attracting global investors seeking attractive returns. Diverging policy expectations between the RBA and Fed are likely to continue supporting the AUD in the near term.