Australian Dollar Falls as Inflation Eases, Boosting Rate Cut Expectations

Key Highlights:

• Inflation slowed to 2.1% in Q2, below market forecasts.
• Australian dollar slipped to US$0.65; bond yields also declined.
• Markets now almost fully expect an RBA rate cut in August.

Markets React to Slower Inflation Data in June Quarter

The Australian dollar and bond yields dipped as fresh data revealed that inflation slowed more than anticipated in the June quarter, increasing the likelihood of an interest rate cut by the Reserve Bank of Australia (RBA). According to the latest figures, quarterly inflation cooled to 2.1%, undershooting economists' expectations.

At the time of writing, the Australian dollar was trading at US$0.65, down from US$0.6532 before the inflation data was released. In the bond market, the three-year yield dropped by 7 basis points to 3.35%, while the 10-year bond rate fell by 3 basis points to 4.27%, reflecting increased confidence that the central bank will shift toward a more accommodative monetary policy.

Rate Cut Speculation Builds Ahead of August RBA Meeting

The weaker-than-expected inflation print has prompted traders to reassess their forecasts for the RBA’s next move. Money markets are now nearly fully pricing in a rate cut at the RBA’s August policy meeting, as easing inflation gives the central bank more flexibility to stimulate the economy without risking an inflationary rebound. Economists suggest that the softening in price pressures could mark a turning point in Australia’s post-pandemic tightening cycle. The RBA had previously maintained a cautious stance, watching for sustained declines in inflation before adjusting interest rates.

Market Sentiment Remains Sensitive

While markets have responded positively to the prospect of a rate cut, analysts caution that external risks, such as global commodity trends and geopolitical tensions, may still impact the RBA’s final decision.

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