Australian Dollar Set for 2nd Weekly Gain

The Australian dollar rose above $0.70 on Thursday, hitting a fresh three-year high, driven by surging gold prices and growing expectations of an imminent rate hike.

Hotter-than-expected inflation data yesterday, along with a surprising fall in unemployment last week, have ramped up bets on a quarter-point increase as soon as next Tuesday.

All of the Big Four Australian banks now see the hike as likely, with market pricing reflecting more than a 70% chance, while rates are fully priced at 3.85% by May and around 4.10% by September.

However, a few are still calling for a hold, noting that the 0.9% quarterly rise in core inflation may not be large enough to move the RBA decisively.

Meanwhile, gold, a key Australian export, surged to nearly $5,600 an ounce, boosting the commodity-linked currency.

Ongoing US dollar weakness also added support amid concerns over possible US-Japan currency intervention, Trump’s remarks, and broader geopolitical, trade, and monetary policy uncertainties.

The Australian dollar traded around $0.691 on Tuesday, heading toward its strongest level since January 2023, underppined by the appeal of higher yields.

Australian government bond yields have become increasingly attractive, with policy-sensitive three-year bonds climbing to its highest level since November 2023 amid investor confidence in Australia’s top-tier credit rating and the central bank’s hawkish policy outlook.

Domestic economic data have further reinforced the case for a rate hike after the unemployment rate unexpectedly fell to a seven-month low in December.

Attention now turns to key inflation data due on Wednesday, with investors closely watching the December monthly CPI and the Q4 trimmed mean measure, with the latter widely regarded as the RBA’s preferred gauge of underlying price pressures.

December’s monthly inflation is expected to rise after stalling in November, while the RBA’s Q4 trimmed mean CPI is seen easing slightly.

The Australian dollar held its recent gains around $0.684, trading near a sixteen-month high, as strong jobs data boosted expectations of a near-term rate hike, while upbeat PMI figures further supported sentiment.

Flash data showed the composite PMI rose to 55.5 in January, its sixteenth straight month of expansion and the strongest since April 2022.

The improvement reflected faster growth in both major sectors, with factory activity growing for a third month and services PMI seeing its sharpest rise since early 2022.

Additionally, recent data showed the unemployment rate unexpectedly fell in December to a seven-month low.

Along with sticky inflation and increasingly hawkish signals from the Reserve Bank, this has boosted bets for rate hikes.

Swaps now price a 55.7% chance of a rate increase in February, up from 26.5% before the data, with over 80% odds for a hike by May.

The focus now turns to next week’s quarterly inflation data, the central bank’s preferred measure of price growth.

The Australian dollar strengthened to around $0.679 on Thursday, approaching a sixteen-month high, as easing US-Europe tensions improved risk sentiment, while strong local jobs data boosted bets on a near-term rate hike.

Data showed employment surged by 65,200 in December, well above forecasts, while the unemployment rate unexpectedly fell to a seven-month low of 4.1%.

The robust labor market, along with rising household spending, suggests the economy is accelerating faster than expected.

This prompted markets to sharply lift bets for a 25bp rate hike at the Reserve Bank’s February 3 meeting, with the odds jumping to 54% from 27% before the data, and a hike now fully priced by May.

Attention now turns to next week’s December-quarter inflation data, where a core inflation increase could push an earlier policy move.

Elsewhere, US President Trump ruled out using force to take Greenland and dropped plans to impose tariffs on European nations, easing market worries.

AUDUSD increased to 0.68, the highest since October 2024.

Over the past 4 weeks, Australian Dollar US Dollar gained 1.62%, and in the last 12 months, it increased 7.85%.

The Australian dollar appreciated to around $0.674 on Wednesday, hitting its highest level in more than fifteen months, as rising geopolitical tensions continued to weigh on the US dollar, while investors awaited upcoming local jobs data this week.

December employment is forecast to rise by around 30,000, with the unemployment rate expected to tick up slightly to 4.4%.

The often-volatile labor market report could bring upside surprises, with a strong result potentially boosting expectations for a February rate hike.

Markets currently assign a 27% chance of a 25 bps hike by the Reserve Bank in February, rising to 76% by May.

Meanwhile, the greenback remained under pressure as investors continued to trim exposure in US markets amid concerns over rising tensions with Europe following President Donald Trump’s escalating rhetoric on Greenland.

Trump has threatened to impose new tariffs on European nations opposing his plan, while European leaders are weighing possible retaliatory measures.