Australia’s services PMI for August is 55.8, with the composite PMI at 55.5. This shows the biggest growth in the services sector in over three years, up from July’s 54.1 for services and 53.8 for the composite. According to S&P Global, the services sector’s growth sped up in mid-Q3 2025 due to strong domestic demand and improving external demand. The Future Activity Index suggests that growth will remain strong in the near term, and employment rose in August. While input costs and output charge inflation are still high, they have decreased compared to July. The composite PMI shows strength in both manufacturing and services, supporting expectations for positive GDP growth in Q3. Earlier, Australia’s S&P Global Manufacturing PMI for August was 53.0, the highest since September 2022. The strong PMI data for August indicates that the Australian economy is performing better than expected. This strength in domestic demand and employment puts pressure on the Reserve Bank of Australia to rethink its neutral stance. As a result, the market is now predicting a higher chance of a rate hike by the end of the year, a significant change from just a few weeks ago. For currency traders, this creates a positive outlook for the Australian dollar. With AUD/USD recently finding support around 0.6850, this data provides a solid reason to expect an upward movement, especially since the last quarterly CPI reading in July 2025 was a stubborn 4.1%. The recovery in external demand also supports the currency, improving the nation’s trade terms. On the equity side, ASX 200 derivatives might show mixed signals. While strong economic activity benefits corporate earnings, especially in the financial and mining sectors, the greater chance of monetary tightening could limit overall market enthusiasm. We expect that value and cyclical stocks will outperform growth sectors in this climate. The key point is that inflation remains high, even though it has eased slightly. We saw a similar situation in late 2022, where strong economic data led to aggressive RBA rate hikes that caused bond yields to spike. Option traders should consider strategies that benefit from increased price movements in both interest rate futures and the AUD. This strong services report comes right after the manufacturing PMI for August reached its highest level since September 2022. The Reserve Bank of Australia, which held the cash rate at 4.35% in its August meeting, will find it hard to overlook this widespread economic strength. We believe preparing for a stronger Australian dollar and higher bond yields is the sensible approach in the coming weeks.

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