The Australian dollar surged higher on Wednesday after data revealed that inflation accelerated much more than expected in May. This development impacted bonds as investors priced in a greater risk of another increase in interest rates.
Inflation surges to 4.0% in May
The monthly consumer price (CPI) report showed annual inflation rose to 4.0% in May, up from 3.6% in April and well above forecasts of 3.8%. A key core measure also picked up to 4.4%, the highest reading in six months.
Also read: Aussie surges as interest rate outlooks diverge
The Reserve Bank of Australia (RBA) had already indicated its vigilance towards upside risks to inflation, suggesting that another rate hike could not be ruled out. This stance was reinforced by the recent inflation data, pushing markets to lift the probability of a rate hike to 39%, up from 12% before the data release, with a move likely in August following the full second-quarter CPI report.
Futures also priced out any chance of a cut in the 4.35% cash rate this year. Only 20 basis points of easing are implied by the end of 2025, compared to 44 basis points earlier in the day.
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The Aussie firmed 0.4% to $0.6675 (AUDUSD), and appeared poised to test resistance around $0.6679. Meanwhile, the New Zealand dollar lagged at $0.6117 (NZDUSD), remaining in a tight $0.6105/6140 range over the past few days.
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Australian bond futures plunge, yields spike
Australian bond futures (YTTc1) for three years slid 14 basis points to 95.970, marking the sharpest daily drop in two months. Yields on 10-year bonds (AU10Y) climbed 11 basis points to 4.315%.
The CPI report for the June quarter is due on July 31, just days before the RBA’s policy meeting on August 7. The central bank had expected the core trimmed mean measure of inflation to slow to 3.8% in the quarter.
Investors should remain cautious as inflation data and central bank policies continue to drive market movements. The Australian dollar’s recent strength may persist if inflationary pressures remain elevated and the RBA maintains its hawkish stance.
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