Hotter inflation revives RBA tightening bets, lifting the Australian Dollar slightly

• Expectations of additional monetary tightening in Australia underpin a 0.08% rise in the Australian Dollar on Friday.
• With Australian inflation climbing to 4.3% in September, expectations of a November interest rate increase have strengthened.
• Persistent inflationary pressures keep policymakers cautious as the Fed leaves interest rates unchanged.

Stronger-than-expected inflation figures and recent hawkish comments from central bank officials have reinforced expectations that the Reserve Bank of Australia (RBA) will raise interest rates, lending support to the Australian Dollar (AUD). Against this backdrop, AUD/USD is trading around 0.7035 at the time of writing on Friday, a modest gain of 0.08% on the day.

September's Consumer Price Index (CPI) increased by 4.3% YoY, up from 4% in August and above the market forecast of 4.2%, according to figures published on Wednesday by the Australian Bureau of Statistics (ABS). With inflation accelerating again, concerns over persistent price pressures have increased, leaving the RBA less scope to maintain its current monetary policy settings.

A hawkish message also came from RBA Governor Michele Bullock, who signalled that the inflationary pressures worrying the central bank were starting to materialise. Speculation about a further rate increase at the forthcoming monetary policy meeting on 3 November has intensified following her remarks.

Markets are now assigning an 80% probability to a rate rise to 4.85% at the forthcoming meeting, up from 60% before the inflation release, according to the ASX RBA Rate Tracker. The Australian Dollar is benefiting from this repricing of monetary policy expectations, with investors increasingly expecting Australian interest rates to stay high for longer.

Uncertainty over the Federal Reserve's (Fed) monetary policy path, meanwhile, is weighing on the outlook for the US Dollar (USD). The central bank kept its benchmark rate in the 3.75%-4.00% range on Wednesday, stressing that forthcoming economic releases would be important in shaping subsequent policy decisions.

Inflation risks remain under close scrutiny from Fed officials. Speaking on Friday, Richmond Fed President Thomas Barkin judged that a gradual approach to interest rates was still appropriate. While the broad direction of monetary policy was relatively clear, he said, the central question concerned the speed of adjustments.

Increasingly widespread cost pressures are also leading US businesses to lift prices, Barkin noted. In particular, he identified surging investment in artificial intelligence as another source of inflationary pressure through its effects on supply chains and aggregate demand.

Persistent inflation could therefore keep the Fed cautious, as these comments suggest. Even so, AUD/USD continues to draw support from mounting expectations of Australian monetary tightening, with investor attention shifting to next week's RBA policy decision.

AUD/USD technical analysis points to a modest bullish bias

Consolidation above the 100-period simple moving average (SMA) at 0.7032 and the 200-period SMA at 0.7026 leaves AUD/USD with a modest bullish bias in the near term. The pair trades at 0.7035 on the one-hour chart and is approaching the immediate horizontal resistance at 0.7040. With the Relative Strength Index (14) near 52, buying interest appears steady rather than stretched, suggesting that pullbacks may draw demand provided the price remains above the underlying moving-average support.

A move higher would first encounter resistance at 0.7040, followed by 0.7055 and a more substantial obstacle near 0.7068. Below the current price, initial support lies at the 100-period SMA of 0.7032, ahead of the 200-period SMA at 0.7026. Should corrective pressure strengthen, the horizontal levels at 0.7010 and 0.6994 provide further support.

(The technical analysis of this story was written with the help of an AI tool. Know more.)