Australian Dollar: Softer inflation tempers rate hike odds – MUFG

MUFG’s Lee Hardman notes that the Australian Dollar, a beneficiary of AI-related demand, has weakened after another softer-than-expected Australian Consumer Price Index (CPI) release. Core inflation undershot the Reserve Bank of Australia's (RBA) May forecasts, easing pressure for further tightening. Hardman highlights that this lower starting point for inflation reduces the urgency for additional RBA hikes, with market-implied odds for one final move later in 2026 now close to 50:50.

Australian CPI surprise weighs on AUD

"The Australian dollar has also been one of the beneficiaries from increased demand related to the AI buildout."

"The Australian dollar has weakened overnight although it was mainly triggered by the release of another softer than expected inflation report from Australia that has dampened expectations for further RBA rate hikes."

"Core inflation surprised to the downside for the second consecutive quarter in Q2."

"The trimmed mean measure of core inflation increased by 0.8%Q/Q and by an annual rate of 3.6%."

"The softer than expected print gives RBA policymakers a better starting point for their updated economic forecasts which helps to ease pressure to hike rates further even as inflation remains above target."