The Governor of the Reserve Bank of Australia has noted that services inflation stays high. The job market is balancing out, indicating a recovery in spending. Inflation for the second quarter was slightly higher than expected, but improvements are being made, even with some caution regarding fluctuating CPI data. Costs for housing and services are unexpectedly high, but overall inflation risks are relatively even.

Australian Dollar Performance

The AUD/USD pair is down 0.46% at 0.6555. The Reserve Bank of Australia sets interest rates and controls monetary policy, targeting an inflation rate of 2-3%. When interest rates are high, the Australian Dollar tends to strengthen. Although inflation usually lowers currency value, moderate inflation can raise interest rates, attracting more investment and increasing demand for the currency. Economic trends can impact currency value. A stronger economy can lead to higher interest rates, which supports the Australian Dollar. Quantitative Easing (QE) happens when interest rates are low, involving the printing of money to buy assets. This typically weakens the AUD. Quantitative Tightening (QT), on the other hand, occurs during economic recovery when the RBA stops asset purchases, likely strengthening the AUD.

Inflation and Monetary Policy Outlook

The Reserve Bank signaled that reducing services inflation is tough. Although overall inflation is improving, these comments point to a slow journey to the 2-3% target range. It indicates that the RBA is unlikely to rush into cutting interest rates. The recent monthly CPI data for September 2025, released last week, supports this cautious approach. It showed a slight increase to 3.1% year-on-year, largely due to higher dwelling and transport costs. This aligns with the expectation of some ups and downs in monthly readings. Looking at the labor market, conditions are improving, but inflation remains a concern. The unemployment rate for September 2025 stayed at 4.2%, which supports wage growth. Although it has eased from below 4% in 2024, it’s still not enough for the RBA to ignore wage pressures. Meanwhile, consumer spending shows signs of recovery after a slow period. Retail sales for August 2025 rose by 0.4%, marking two months of growth. While this is positive for the economy, the increased demand might contribute to persistent services inflation. For derivative traders, the current situation suggests the cash rate will likely remain unchanged through the end of 2025. This makes betting on high short-term interest rates an appealing strategy. Given that the AUD/USD is down to 0.6555, despite comments hinting at a stronger stance, the stronger US dollar is likely taking the lead, making AUD/USD call options less appealing. A similar situation occurred in late 2023 when markets anticipated rate cuts too early, only for inflation data to remain stubborn. This history suggests that the implied volatility of the Australian dollar might be underestimated. Strategies that could benefit from a sudden movement, like buying straddles on the AUD/USD, may be worth considering in the next few weeks. Create your live VT Markets account and start trading now.

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