The Australian dollar traded lower against the US dollar during the Asian session on Friday, moving around the 0.7035 level.
Stronger-than-expected US Producer Price Index data released overnight boosted the US dollar while weighing on the Aussie.
Data from the US Bureau of Labor Statistics on Thursday showed the PPI's robust performance provided further evidence that inflationary pressures are building.
US PPI Posts Largest Gain in Over Three Years, Rate Hike Expectations Rise
The US Producer Price Index for May rose 6.5% year-on-year, up from 5.7% in April and exceeding the market forecast of 6.4%, marking the highest level since November 2022. On a monthly basis, the PPI increased by 1.1%, significantly above the expected 0.7% and accelerating from April's 0.5% monthly gain. This report offered more evidence that the conflict in the Middle East is pushing up energy product costs and that inflation pressures are continuing to build.
Looking at the components, energy prices were the primary driver behind the stronger-than-expected PPI rise. The energy component rose 5.2% month-on-month in May, contributing nearly half of the overall PPI increase.
Meanwhile, food prices and service costs also remained firm, indicating inflationary pressures are spreading from the energy sector to broader areas. Notably, the core PPI, which excludes food and energy, rose 4.8% year-on-year, also higher than the previous reading and market expectations, suggesting underlying inflation pressures remain persistent.
According to the CME FedWatch Tool, markets are currently pricing in a 43% probability of a 25-basis-point rate hike in December, compared to just around 14% a month ago. This shift reflects investors' growing expectations that the Federal Reserve will maintain higher interest rates for longer.
More notably, the market probability of no rate cuts at all within 2026 is also rising, with some traders even beginning to price in the possibility of further hikes in 2027.
The stronger-than-expected PPI data, combined with the previously released CPI data returning above 4%, is gradually shifting market expectations for the Fed's policy path from "when to cut rates" to "whether more hikes are needed."
If inflation data in the coming months continues to show persistence, the Fed may be forced to re-tighten its policy stance.
RBA Meeting Next Week, Markets Expect No Change
The Reserve Bank of Australia is set to announce its next interest rate decision next Tuesday, with market expectations for a further RBA rate hike cooling. Since February this year, the RBA has raised rates three times by a total of 75 basis points, lifting the cash rate target to 4.35% to curb inflation pressures that had begun building even before the outbreak of the Middle East conflict.
However, tighter monetary policy is beginning to transmit to the real economy—first-quarter GDP growth slowed sharply to 0.3% from 0.9% in the previous quarter, and the unemployment rate rose to 4.5% in April, the highest level since November 2021. The cooling economic data provides policymakers with breathing room to assess the impact of previous rate hikes.
Australia's four major banks all expect the RBA to keep rates on hold at its upcoming meeting. National Australia Bank has abandoned its previous expectation for an August hike, believing the cash rate has peaked in this cycle and the next move is more likely to be a cut, though the timing remains uncertain. Westpac holds a different view, maintaining its forecast for hikes in August and September, expecting the rate to reach 4.85%, but also noting that risks are skewed towards a more modest tightening cycle—with the likelihood of zero or one hike being higher than three. Commonwealth Bank and ANZ believe 4.35% is the terminal rate for this cycle.
Analyst Perspectives
Westpac expects the RBA to hold rates steady at its June meeting but retains the possibility of further hikes in August and September.
The bank has lowered its peak inflation forecast from 5.0% to 4.7% but emphasizes that its projected inflation path remains above the RBA's own target, suggesting policymakers may face persistent upside inflation pressures.
Westpac also notes that downside risks are dominant—if economic data weakens further, the likelihood of zero or one hike is higher than three. For the Australian dollar, this means rate expectations will be a source of volatility. If a hike occurs in August as expected, the Aussie could receive short-term support; conversely, if the RBA signals a clearer pause, the currency could face further pressure. Markets will need to focus on the tone of the RBA's statement following next week's meeting.
Rabobank maintains a bullish medium-term view on the Australian dollar. The bank notes the Aussie was one of the best-performing G10 currencies in 2026, benefiting from the RBA's three rate hikes and decisive abandonment of dovish guidance. Although recent soft domestic Australian economic data suggests the hiking cycle may be nearing its peak, Rabobank believes the Aussie remains in a favorable position from a relative economic fundamentals perspective. The bank expects one more RBA rate hike this year, possibly in August.
Looking at the daily chart, the Australian dollar against the US dollar retreated after a previous rally and is currently in a consolidation phase. The price has fallen below short-term moving averages, indicating a weakening short-term uptrend, but it remains above medium- and long-term moving averages. The broader uptrend has not been reversed, with multiple key support levels below and clear resistance from previous highs above.
Regarding technical indicators, the MACD histogram is gradually shrinking, indicating a continued decline in bullish momentum, with the two lines showing signs of convergence, suggesting increased short-term correction risk. The RSI indicator has retreated from high levels to a neutral zone, with bullish and bearish forces becoming more balanced, showing no overbought or oversold signals for now.
Final Take: Aussie Pressured by Dollar Strength and RBA Caution
Overall, stronger-than-expected US PPI data has reinforced market expectations for the Federal Reserve to maintain higher interest rates, providing support for the US dollar. Meanwhile, expectations for the RBA to hold steady next week leave the Australian dollar lacking upward momentum. The combination of these factors is putting clear short-term pressure on the AUD/USD pair.
Market focus will now shift to upcoming US consumer confidence data and next week's RBA interest rate decision. Any signals that deviate from expectations could trigger volatility in the Australian dollar.
As of 12:21 Beijing Time on June 12, the Australian dollar was trading at 0.7038/39 against the US dollar.
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