The Australian dollar strengthened to around $0.713 on Thursday, its highest level since early August 2022, as markets increasingly priced in the likelihood of another interest rate increase. Traders are now assigning roughly an 80% probability that the Reserve Bank of Australia will raise its 3.85% cash rate in May, following stronger-than-expected inflation data for January. Markets currently expect about 40 basis points of cumulative tightening over the course of the year, although many analysts project a terminal rate of around 4.10%, near the peak reached during the post-pandemic inflation surge.
In contrast, a move as early as March is seen as less likely, given that policymakers will not receive the full first-quarter inflation report until late April. RBA Governor Michele Bullock has also reiterated that a patient approach remains appropriate with the economy operating close to equilibrium, helping to temper expectations of a more aggressive tightening cycle. Investors are now turning their focus to next week’s final manufacturing PMI release and GDP data for additional insight into Australia’s economic momentum.