Traders are keenly watching the latest Consumer Price Index (CPI) or inflation figures, with the Reserve Bank of Australia (RBA) potentially eyeing a rate hike in their upcoming meeting. According to the most recent figures from the Australian Bureau of Statistics (ABS), the monthly Consumer Price Index (CPI) indicator surged by 4.0 percent over the year leading up to May 2024, an increase from the 3.6 percent recorded in April. The primary drivers of this annual rise to May were housing, which climbed by 5.2 percent; food and non-alcoholic beverages, which went up by 3.3 percent; transport, which increased by 4.9 percent; and alcohol and tobacco, which soared by 6.7 percent.
Key Events and Data
RBA’s Pending Meeting
The Reserve Bank board is slated to meet in the first week of August to discuss the nation’s monetary policy. This meeting will occur after the release of the next quarterly inflation data, which traditionally plays a pivotal role in the RBA’s decisions. During the last two meetings, the RBA deliberated on the possibility of raising interest rates but opted to hold them steady at 4.35%.
Driving Factors Behind Rising Inflation
The primary factor contributing to the unexpectedly high inflation last month was the surge in housing costs, which saw a 5.2% increase over the past year. According to the Australian Bureau of Statistics (ABS), rents climbed by 7.4% annually, highlighting a tight rental market nationwide. Additionally, new dwelling prices remained steady at a 4.9% annual rise, with builders passing on the higher costs for labor and materials to consumers.
Fundamental Analysis
Prospects for an RBA Interest Rate Hike
The hotter-than-expected CPI figures for May have reignited discussions around a potential interest rate hike by the RBA. Australian CPI rose by 4.0% year-over-year in May, surpassing the estimated growth of 3.8%. This spike in inflation has bolstered expectations that the RBA may consider raising rates to curb the rising cost of living.
Market Impact on AUD/USD
The market reaction to the recent CPI data has been notable. The AUD/USD pair is currently holding its latest recovery leg, with the exchange rate approaching the 0.6700 mark. The higher-than-expected inflation figures have fueled speculation about an RBA rate hike, providing a boost to the Australian dollar.
AUDUSD 4-hour Chart
Conclusion
With inflation figures exceeding expectations, traders should anticipate potential shifts in the RBA’s monetary policy. The upcoming meeting in August, following the release of quarterly CPI data, will be critical in determining whether the RBA opts to raise interest rates. For now, the AUD/USD pair continues to show strength, reflecting market sentiment driven by the latest economic indicators. The market is awaiting the PCE price index report which may impact the dollar and associated currencies.
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