AUD/USD Stalls Below 0.71 Despite a Hawkish RBA

The Reserve Bank of Australia left the cash rate at 4.35% on Tuesday, but Governor Michele Bullock said another increase was “quite possible.” The market response pushed expectations towards roughly a 50% chance of a November hike. This morning, Assistant Governor Christopher Kent went further: inflation risks remain heavily skewed to the upside and, in his words, “a lot of things” would need to go right for rates to remain unchanged. Markets now assign roughly a 54% probability that the cash rate reaches 4.60% by December.

The US side should also be helping.

July US CPI rose only 0.1% on the month, and markets reduced the probability of another Federal Reserve hike in September to around 40%, from 54% a week earlier.

So the obvious FX equation currently reads:

a relatively hawkish RBA,

a less hawkish Fed,

and an Australian policy rate already above the US federal funds target range.

Yet AUD/USD is still below 0.71.

The explanation is not that interest-rate expectations have stopped mattering. It is that the reason Australia may need higher rates is becoming less attractive for the currency itself.

The RBA sounds hawkish, but it is not describing a strong economy

There is an important difference between two types of rate-hike cycle.

One happens because domestic demand is accelerating, employment is exceptionally strong, investment is expanding and households can tolerate tighter financial conditions.

The other happens because the economy has trouble producing enough goods and services at reasonable cost, imported energy has become expensive and inflation remains high even while demand is already slowing.

Australia currently contains much more of the second problem than the first.

The RBA’s 11 August statement said financial conditions had tightened after three increases in the cash rate this year. Consumer spending growth was slowing, housing prices were falling in some cities and new housing lending had declined noticeably. Labour-market conditions had also eased somewhat more than the Bank had expected.

The August forecasts go further.

The RBA expects Australian GDP growth to slow through 2026 and remain below estimated potential growth through the forecast period. Growth is being restrained by weaker real household income, softer housing conditions and the earlier increase in interest rates. The unemployment rate is projected to rise gradually from 4.4% to 4.8% by the end of 2028.

This is not the macroeconomic backdrop normally associated with a currency receiving a large growth premium.

The RBA may still raise rates.

But it would be doing so while deliberately slowing an economy that is already expected to grow below potential.

That makes the next 25 basis points less valuable to AUD than a similar hike delivered into accelerating Australian growth.

The inflation problem has an uncomfortable source

Australia’s June-quarter inflation figures were actually softer than the RBA had feared.

Headline inflation was 3.9% year on year, far below the 4.8% rate the Bank had expected in its May forecasts. Trimmed-mean inflation was 3.6%, also slightly softer than expected.

If that were the whole story, the August meeting would probably have sounded considerably less hawkish.

The complication is the Middle East.

The RBA says oil and related commodity prices remain above their pre-conflict levels, firms are beginning to pass higher costs through into their prices, and another prolonged disruption to energy supply could keep inflation higher for longer.

Kent made exactly that point today. One of the things that must “go right,” he said, is a reasonable reopening of the Strait of Hormuz. If it does not happen, the Bank may face additional inflation pressure and a greater need to tighten.

That sounds bullish for Australian interest rates.

It is much less obviously bullish for the Australian economy.

Higher imported and transport costs reduce household purchasing power. They squeeze company margins where costs cannot be passed through. And if the RBA responds with higher borrowing costs, households are hit from both directions.

For an FX market, that matters.

A rate hike caused by exceptionally strong domestic demand is usually easier to treat as currency-positive.

A rate hike required to contain a supply shock can come with lower real growth at the same time.

AUD/USD is currently distinguishing between those two kinds of hawkishness.

Productivity is the second reason the RBA’s hawkishness has a bad side

Kent also singled out productivity today.

The RBA assumes medium-term trend productivity growth eventually returns to around 0.7% a year, but recent performance has been substantially weaker. Non-farm labour productivity increased only 0.1% over the year to the March quarter and fell 0.6% during that quarter alone.

That is more important to the rate story than it initially sounds.

When productivity is weak, an economy cannot increase output very quickly without running into labour and capacity constraints.

Demand that would be harmless in a high-productivity economy can become inflationary much earlier.

The RBA can therefore be forced to restrain demand even when headline GDP growth does not look particularly impressive.

This is one reason Australia can simultaneously have:

subdued expected GDP growth,

a gradually rising unemployment rate,

and an RBA still discussing higher interest rates.

The combination is hawkish for nominal rates but not necessarily bullish for the Australian dollar.

The currency would prefer the RBA to be hawkish because the Australian economy is outperforming.

Instead, part of the hawkishness reflects concern that the economy’s speed limit is unusually low.

That is a much less attractive story.

The housing market shows that 4.35% is already doing real damage

The clearest evidence that monetary policy is already restrictive is appearing in housing.

Australian housing prices have declined 1.6% from their March peak, according to the RBA. The Bank says the weakness reflects a combination of higher interest rates, tax changes and the broader economic environment.

Separate market data showed national home prices falling another 0.7% in July, the largest monthly drop since December 2022.

The lending channel is weakening as well.

ANZ said this week that home-loan applications had fallen 12%, while the RBA noted a noticeable decline in new housing lending. Kent said today that slowing housing credit should increasingly discourage spending over time.

This gives the market a reason not to chase the terminal RBA rate much higher.

Another increase remains possible.

Two or three additional increases are a much harder proposition when the interest-sensitive part of the economy is already responding this visibly.

That distinction helps explain an otherwise strange piece of market pricing.

Investors assign a meaningful probability to a move to 4.60%, but many economists surveyed by Reuters still believe 4.35% will prove to be the peak.

The market is therefore pricing insurance against another hike, not the beginning of a large new Australian tightening cycle.

AUD/USD has little reason to price one either.

The RBA’s own forecasts quietly make the same point

The language from Bullock and Kent has been noticeably hawkish.

The technical assumptions behind the RBA’s economic forecast are much less dramatic.

The August Statement on Monetary Policy is conditioned on a market path in which the cash rate rises by only around 10 basis points over the remainder of 2026 before eventually moving back towards approximately 4.4%. That assumed path is about 25 basis points lower than the one used in the May forecasts.

This is one of the more useful details in the entire August RBA package.

The Bank is warning that it could raise rates.

Its central economic forecasts are not built around an aggressive series of further increases.

That is broadly consistent with what AUD/USD is doing.

The currency is not dismissing the possibility of 4.60%.

It is refusing to value Australia as if 4.60% is the first step towards 5%.

That is a very different trade.

The muted reaction after Tuesday was already telling us this

The price action around the RBA meeting itself was revealing.

The decision was unanimous, Bullock explicitly kept another hike on the table, and Australian three-year government bond yields rose two basis points to 4.572%.

AUD/USD was still virtually unchanged around 0.7055.

Today, after Kent delivered another warning about upside inflation risks, the Australian dollar was still only around 0.7062.

Two hawkish communications in three days have therefore produced very little currency follow-through.

That is more informative than another general statement that “higher rates support the Aussie.”

The market has heard the RBA.

There simply has not been enough new rate information to justify paying materially more for AUD.

By Thursday, swaps already implied about a 54% chance of a move to 4.60% by December. Once a substantial share of that possibility is already inside the curve, another official saying rates may have to rise produces diminishing returns for the currency.

For AUD/USD to move decisively higher from here, the market needs something stronger than another warning.

It needs the probability of a hike to become the probability of a sequence.

Current Australian data do not support that conclusion yet.

Softer US CPI helps AUD, but the dollar has not lost its yield story

The American side prevents this from becoming a purely Australian analysis.

July CPI was friendly enough to reduce the chance of a September Fed increase. US prices rose 0.1% on the month, while the market now prices only around a 40% chance of a hike at the next meeting.

That is one reason AUD/USD is holding above 0.70 despite the problems in Australia’s domestic outlook.

But the US inflation report was not a policy reversal.

The US 10-year Treasury yield remained around 4.69% this morning, even after the CPI release. The dollar index was also broadly steady near 99.93.

The market has reduced the probability of one Fed increase.

It has not begun pricing a rapid fall in US yields.

That matters because AUD/USD does not trade on policy rates in isolation. The broader return available on US fixed-income assets remains high, and the dollar still retains enormous liquidity and defensive demand when geopolitical risk rises.

Australia has a 4.35% cash rate and possibly another hike ahead.

That is supportive.

It is not an automatic reason for global investors to move aggressively out of dollars and into Australian dollars.

The next move above 0.71 needs a different kind of evidence

This is where the current setup becomes more useful for trading than simply calling the RBA “hawkish.”

Another speech about upside inflation risk probably does not change much.

The market already knows that story.

A more convincing AUD/USD move through 0.71 would require evidence that the Australian inflation problem is remaining persistent without the growth side deteriorating faster.

That could come from stronger domestic demand, a labour market that stops easing, or wage and services inflation that remains firm enough to make 4.60% look like the beginning of a genuinely higher terminal-rate path rather than a one-off insurance hike.

The June-quarter Wage Price Index will not be released until 19 August, so the market does not yet have the next major wage confirmation.

The other route is through the United States.

US producer prices and retail activity can reduce Fed tightening expectations further. If US short-term rate expectations continue moving lower while the RBA’s 4.60% risk remains intact, the relative-rate argument for AUD/USD becomes more convincing.

Until then, 0.71 is difficult precisely because the two recent developments are less powerful than they appear.

The RBA is hawkish, but largely because inflation is difficult.

The Fed is less hawkish, but US yields remain high.

That is enough to keep AUD/USD supported around 0.706.

It is not yet enough to create a clean Australian-dollar breakout.

The important signal from this week is therefore not that AUD has failed to react to higher Australian rate expectations.

It is that the market is assigning a lower value to why those rates might have to rise.