Australian Dollar holds near one-month highs with CPI and Fed in focus

On Tuesday, the Australian Dollar (AUD) edged higher, trading near one-month highs at 0.7027, as hawkish expectations from the Reserve Bank of Australia (RBA) bolstered its performance against its major peers. The recovery in equity markets, stemming from concerns over heavy AI spending, further aided the risk-sensitive Aussie. However, the US Dollar (USD) remained stronger, limiting the pair's upside. As of now, AUD/USD trades around 0.7027, near one-month highs.

Traders are now eagerly awaiting Australia's inflation data and RBA Governor Michele Bullock's parliamentary testimony on Wednesday. These events could significantly influence expectations for the RBA's November interest rate decision. Additionally, the Federal Reserve's (Fed) monetary policy announcement on the same day adds another critical test for the AUD/USD pair.

According to August forecasts, Australia's headline Consumer Price Index (CPI) is expected to rise 0.7% in September, up from 0.4% in August, leading to an annual rate of 4.2% from 4%. Traders will also closely monitor trimmed mean inflation for indications of underlying price pressure. The monthly measure is forecasted to increase by 0.3% in September after growing by 0.2% in August.

Analysts, such as Brown Brothers Harriman's Elias Haddad, warn that "firmer inflation would also strengthen the case for a back-to-back 25bps RBA cash rate hike to 4.85% at the next November 3 meeting (70% pried in) and widen AUD's yield advantage." The upcoming inflation prints would leave headline inflation above the RBA's year-end forecasts of 3.6% and trimmed mean inflation above 3.3%, reinforcing Deputy Governor Andrew Hauser's recent statement that the inflation outlook is "materially worse" than initially assessed in August.