RBA Warns of Second-Round Inflation Effects, Aussie Dollar May Benefit from Shifting Expectations

Summary:

The Reserve Bank of Australia (RBA) has become increasingly concerned about a renewed wave of inflationary pressures stemming from higher energy prices. While Australian consumer confidence remains subdued, policymakers appear unwilling to ease their inflation-fighting stance. As inflation risks re-emerge, market expectations for additional policy tightening later this year are gradually returning, potentially providing near-term support for the Australian dollar.

BUY AUDUSD

EXP

TRADING

0.70508

Entry Price

0.73450

0.68300

0.70436 -0.00071 -0.10%

0.0

Pips

Flat

0.68300

Exit Price

0.70508

Entry Price

0.73450

Fundamentals

Market attention toward the Australian economy is gradually shifting from concerns over slowing growth to the risk of persistent inflation.

RBA Governor Michele Bullock delivered a relatively hawkish message during recent parliamentary testimony. She acknowledged that previous monetary tightening measures are beginning to have the desired effect, with softer demand and easing price pressures indicating that higher interest rates are gradually filtering through the economy. However, policymakers are increasingly focused on a new source of risk rather than the progress already achieved.

With tensions in the Middle East remaining elevated, energy prices have once again become a major driver of global inflation dynamics. For Australia, higher fuel costs not only increase household expenses directly but may also spread through transportation, construction, and service sectors, creating broader inflationary pressures.

The RBA is particularly concerned about these so-called "second-round inflation effects." This refers not to the initial rise in oil prices themselves, but to the subsequent pass-through of higher costs into wages, housing construction, and service-sector pricing. Once these secondary effects take hold, inflation becomes far more persistent, requiring tighter monetary policy for a longer period.

Recent data suggest that this risk may already be emerging. Australia's consumer sentiment index has fallen back toward historically depressed levels. Households reported worsening assessments of both current financial conditions and income prospects over the next year, highlighting the ongoing pressure from elevated living costs and higher borrowing expenses.

At first glance, weak consumer confidence could be interpreted as an argument for future rate cuts. However, the RBA's challenge is that inflation risks remain elevated even as economic growth slows.

This combination of slower growth and sticky inflation creates a difficult policy environment.

Markets widely expect the RBA to keep interest rates unchanged at its upcoming meeting while assessing the lagged impact of previous rate hikes. Nevertheless, interest-rate futures markets have begun repricing the possibility of additional tightening later this year.

Should core inflation fail to show meaningful improvement over the coming months, the RBA is likely to maintain its hawkish bias, which could become a significant source of support for the Australian dollar.

At the same time, with the Federal Reserve entering a wait-and-see phase, the scope for further widening in the Australia-U.S. interest-rate differential appears limited, reducing some of the external pressure facing AUD.

From a broader macro perspective, market focus is gradually shifting from "Australian economic slowdown" toward "higher rates for longer." This change in expectations could support a medium-term recovery in the Australian dollar.

RBA Warns of Second-Round Inflation Effects, Aussie Dollar May Benefit from Shifting Expectations_1

Technical Analysis

AUDUSD has staged a rebound after finding support near the 0.6900 area, suggesting that bearish momentum is beginning to fade.

The pair has reclaimed several key moving-average zones, while buyers are attempting to regain control of the broader trend. A decisive break above the 0.7095 resistance level would indicate that the correction from the 0.7278 peak has likely concluded, opening the door for a more substantial recovery.

Conversely, a move back below 0.6897 would signal that the broader bearish trend remains intact, bringing the 0.6831 support area into focus.

Overall, as expectations for a more hawkish RBA re-emerge, the risk-reward profile for AUDUSD is gradually becoming more favorable for bullish positioning.

Trading Recommendation

Trading Direction: Buy

Entry Price: 0.7015

Target Price: 0.7345

Stop Loss: 0.6830

Valid Until: 2026-07-11 23:55

Support Levels:0.7004, 0.6979, 0.6953

Resistance Levels:0.7078, 0.7145, 0.7201

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