Insights 
VT 
The Reserve Bank of Australia Governor stated that services inflation remains persistent. The labour market is approaching balance, showing recovery in consumption.
Q2 inflation was slightly above expectations but is improving, with a caution towards volatile CPI data. Dwelling and service costs are unexpectedly elevated, with inflation risks relatively balanced.
Australian Dollar Performance
The AUD/USD pair is trading 0.46% lower at 0.6555.
The Reserve Bank of Australia sets interest rates and manages monetary policy, aiming for an inflation rate of 2-3%. High interest rates strengthen the Australian Dollar.
Traditionally, inflation devalues currency, but now moderate inflation can raise interest rates, attracting capital inflows and increasing currency demand.
Economic data affects currency value; stronger economies can lead to higher interest rates supporting the Australian Dollar.
Quantitative Easing, used when interest rates are insufficient, involves printing money to buy assets, typically weakening the AUD.
Quantitative Tightening, the opposite, occurs during economic recovery, as the RBA stops asset purchases, potentially strengthening the AUD.
Inflation and Monetary Policy Outlook
We are seeing the Reserve Bank signal that services inflation is proving difficult to bring down. While headline inflation is moving in the right direction, these comments suggest the path to the 2-3% target band will be slow. This reinforces the idea that the RBA will not be in a rush to cut interest rates.
The latest monthly CPI indicator for September 2025, released last week, supports this cautious view, showing a slight uptick to 3.1% year-on-year. This was largely driven by the dwelling and transport components, aligning with the observation that certain costs are higher than expected. This data confirms the central bank’s warning that we should expect some volatility in the monthly readings.
From a labor market perspective, things are moderating but remain a point of focus for inflation. The most recent data for September 2025 showed the unemployment rate holding at 4.2%, which is still tight enough to support wage growth. We have seen a gradual easing from the sub-4% levels of 2024, but it is not yet at a point where the RBA can stop worrying about wage-price pressures.
At the same time, we see signs that consumer spending is picking up after a period of weakness. Retail sales figures for August 2025 showed a modest 0.4% increase, marking the second consecutive month of growth. While positive for the economy, this recovering demand could add to the sticky services inflation problem.
For derivative traders, this environment suggests the cash rate will likely remain on hold through the end of 2025. This makes selling short-term interest rate futures, which bet on rates staying high, an interesting strategy. Given the Aussie dollar’s weakness to 0.6555 despite these hawkish-leaning comments, it seems a stronger US dollar is dominating, making AUD/USD call options less attractive.
We saw a similar dynamic back in late 2023, when markets tried to price in rate cuts prematurely, only for inflation data to prove stubborn. This history suggests that implied volatility on the Australian dollar may be underpriced. Strategies that benefit from a potential sharp move, such as buying straddles on the AUD/USD, could be considered in the coming weeks.
