Risk sentiment and a softer US dollar lift AUD/USD
AUD/USD finished higher last week at 0.7202 (+0.76%), marking its strongest weekly close in four years. This impressive performance was driven by a potent combination of factors both domestically and offshore.
As a core member of the risk complex, the Australian dollar benefited from a clear improvement in global risk sentiment. Powered by robust corporate earnings and renewed enthusiasm for the artificial intelligence (AI) trade, key risk barometers such as the S&P 500 and the Nasdaq 100 pushed to fresh record highs. This, in turn, weighed on the safe‑haven US dollar.
The greenback also came under additional pressure late last week after Japanese authorities intervened in currency markets for the first time since July 2024. Stepping in aggressively afterUSD/JPY broke above the 160 level, Tokyo is believed to have spent around $35 billion in a single day selling US dollars and buying yen, successfully driving the Japanese currency higher by as much as 3% in one session.
Inflation data sharpens focus on the RBA
Adding to the positive domestic backdrop, last week’s Australian consumer price index (CPI) report showed headline inflation accelerating to 4.6% year-on-year (YoY) in the 12 months to March. Up sharply from 3.7% the previous month, it marked the highest reading since September 2023. This jump, driven largely by surging fuel costs, sets the stage for this week’s highly anticipated Reserve Bank of Australia (RBA) board meeting, which will act as the key local driver for AUD/USD.
Looking offshore, aside from developments in the Middle East which remain fluid, broader risk sentiment is expected to continue dictating AUD/USD’s direction. This will be heavily influenced by the ongoing first quarter (Q1) US earnings season, with reports due from heavyweights including AMD, Palantir, McDonald’s, Disney and Uber.
In addition, the US labour market will be firmly under the microscope, with Job Openings and Labor Turnover Survey (JOLTS) job openings and Automatic Data Processing (ADP) employment data leading into Friday’s headline non‑farm payrolls report.
RBA interest rate decision
Date: Tuesday, 5 May at 2.30pm AEST
At its last meeting in March, the RBA lifted the official cash rate by 25 basis points (bp) to 4.10% in a narrow 5-4 decision. This marked the second consecutive hike following February and reflected the Board’s assessment that inflation risks could remain elevated for longer than previously expected, given capacity constraints and the inflationary impact of sharply higher fuel prices stemming from the Middle East conflict.
In principle, such developments are often supply‑side shocks that central banks attempt to look through. However, with inflation already running above target and short‑term inflation expectations rising further, the RBA has expressed clear concern. This has been reinforced by hawkish commentary from Deputy Governor Andrew Hauser, who warned that higher oil prices would only exacerbate already ‘too high’ inflation pressures.
Since the March board meeting, domestic data have presented a mixed picture. As noted above, headline inflation in March jumped to 4.6% YoY from 3.7%, largely driven by a sharp 32.8% rise in petrol prices, while the trimmed mean measure remained steady. The labour market, meanwhile, has continued to show resilience, with unemployment holding around 4.3%.
On the softer side of the ledger, household spending and housing price growth have moderated. Consumer and business confidence remain subdued and, notably, petrol prices have fallen back towards pre‑conflict levels.
This unexpected reversal in petrol prices, one of the largest contributors to March’s inflation spike, alongside these softer indicators, provides the RBA with a very narrow pathway to an unexpected ‘on hold’ decision this week.
Such a pause would give the RBA more time to assess a broader range of incoming data, including consumer and business confidence, household spending, employment and the April inflation report, ahead of the 16 June board meeting. Crucially, it would also allow policymakers to gauge any potential shifts in the Middle East stalemate and fully assess any tightening measures contained in the Federal Government’s budget, due to be handed down on 12 May.
Putting it all together, while a surprise pause cannot be ruled out, the balance of probabilities remains tilted towards the RBA delivering another 25 bp rate increase to 4.35%. This would mark the RBA’s third hike this year and fully unwind last year’s 75 bp of rate cuts.
In terms of updated forecasts in the accompanying statement on monetary policy, gross domestic product (GDP) growth is expected to be revised lower across the forecast horizon, reflecting higher oil prices and interest rates. Near‑term trimmed mean inflation forecasts are likely to be lifted modestly, while projections further out are expected to be reduced in line with a softer growth outlook.
The Australian interest rate market is currently pricing in around 19 bp of tightening for this week’s meeting. Looking further ahead, a cumulative 64 bp of rate hikes are priced into the curve for 2026.
