Australia’s CPI rose 3.5% year-on-year in July, easing from 3.8% in June and above the 3.2% forecast, according to the Australian Bureau of Statistics. On a monthly basis, CPI increased 1.0% after a 0.1% fall previously, outpacing the 0.8% estimate. The trimmed mean measure rose 0.5% month-on-month, while the annual trimmed mean CPI printed at 3.6%. Following the release, AUD/USD was up 0.13% at 0.7172, with the pair previously trading just below 0.7180 and hovering around 0.7150 ahead of the data.
In the earlier preview, the July CPI was expected at 3.2% year-on-year with monthly CPI at 0.8% after -0.1%. Markets also looked to the Reserve Bank of Australia’s preferred gauge, with trimmed mean forecasts of 3.5% annually and 0.3% monthly. The RBA left the Official Cash Rate unchanged at 4.35% after considering a fourth hike, and its minutes indicated trimmed mean inflation was expected to stay above 3% until mid-2027. Annual CPI peaked at 4.6% in March, while technical levels cited for AUD/USD included 0.7070, 0.7080, 0.7130, 0.7135 and 0.7000.
Positioning for a Hawkish RBA and Market Implications
With Australia’s July inflation coming in hotter than expected at 3.5%, we believe derivative traders should position for a hawkish Reserve Bank of Australia (RBA) in the coming weeks. The monthly CPI surge of 1.0% and sticky trimmed mean inflation of 3.6% make an imminent cut to the 4.35% cash rate highly improbable. Consequently, we should expect upward pressure on Australian bond yields and short-term interest rate futures.
Trading Strategies for FX and Interest Rate Markets
In the FX options market, we recommend buying near-term AUD/USD call options with strike prices targeting 0.7250 as the currency pair tests multi-month highs. Historically, when Australian core inflation remains well above the RBA’s 2% to 3% target range, the Australian Dollar experiences sustained support against a weakening US Dollar. This upward momentum is further supported by key technical indicators, with the 20-day SMA crossing above the 100-day SMA near 0.7070, providing a solid base for buyers.
For interest rate traders, we suggest shorting ASX bank bill futures as the market prices out any remaining hopes for rate cuts this year. Historical data shows that when monthly trimmed mean inflation beats expectations, the RBA maintains a restrictive policy stance for longer than the market anticipates. Keeping an eye on the 0.7135 support level will be crucial for managing risk on any short-term pullbacks before we see the pair accelerate further.
