ING’s Francesco Pesole highlights that the Australian Dollar (AUD) is the only G10 currency gaining this week as hotter July inflation and strong household spending fuel hawkish Reserve Bank of Australia (RBA) expectations. ING’s macro team still favours a prolonged RBA hold, expecting benign inflation and a steady Fed to reduce urgency, with AUD/USD targeted at 0.730 by year-end but near-term gains limited as rate pricing is unwound.

Hot data versus prolonged RBA hold

“The Aussie dollar is the only G10 currency gaining ground this week amid a broad USD rebound. Hotter-than-expected inflation for July (3.5% headline, 3.6% trimmed mean) has caused a rapid rebuilding of hawkish expectations, with markets now pricing in a 28bp by year-end. That’s around a 15bp jump since the start of the week.”

“This morning, Australia reported very strong household spending data for July (7% YoY), further helping the case for more tightening. However, our macro team is still leaning towards a prolonged hold by the Reserve Bank of Australia, but we admit the hawkish risks have increased.”

“House prices are declining and unemployment has edged higher, trends that should become clearer in the 2Q GDP data. Moreover, the Reserve Bank of Australia will likely wait for another set of quarterly numbers before concluding that the pickup in inflation is anything more than a one-off.”

“Ultimately, we expect the inflation trajectory to prove benign enough to avert another hike, with our call for a Fed on a prolonged hold also diminishing any sense of urgency in Australia.”

“Markets are pricing in 12bp for the 29 September meeting, and we expect that pricing to be unwound, limiting AUD gains for now. Our view on AUD/USD remains upbeat into year-end with a 0.730 target, but that’s relying on our dovish Fed call, which should have a net-positive impact on the pair even if a dovish repricing in the AUD curve happens.”