Importance of July CPI Data

The unexpected rise in Australian inflation is a big deal for us. Today’s CPI data for July showed inflation increasing to 2.8% year-over-year, far exceeding expectations. The core measure also rose to 2.7%. This challenges the belief that the Reserve Bank of Australia (RBA) would keep interest rates stable, with many thinking rate cuts would start in 2026. This report has quickly changed expectations for interest rates ahead of the RBA meeting on September 30. Previously, overnight index swaps suggested almost no chance of a rate hike, but now there’s a small possibility. The Australian dollar rose slightly to 0.6503, indicating that the market is waiting for more confirmation before taking significant action. We should view this inflation data alongside a strong labor market, where the unemployment rate has remained just below 4% for most of 2025. The combination of rising prices and a tight job market puts the RBA in a tough spot, raising the stakes for their next policy decision.

Impact of August CPI Release

However, this monthly data is not complete and mainly reflects goods inflation. The August CPI release on September 24 will be key, offering better insights into services inflation just before the RBA meeting. This creates a time of uncertainty and suggests that volatility might be underestimated. Looking back at 2022-2023, we saw the RBA react strongly to unexpected inflation, even as global trends softened. This history indicates that the board will take this new data seriously, making the August CPI a crucial event for potential policy changes. Consequently, derivative positioning should focus on the chance of a sharp move in late September. In the coming weeks, traders should think about buying volatility on the Australian dollar and short-term interest rates. Strategies like purchasing straddles or strangles on AUD/USD options expiring after the September 24 data release could be effective. The market is currently balancing a surprisingly high inflation signal against known data limitations, creating a perfect scenario for a volatility-driven approach. Create your live VT Markets account and start trading now.

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