Fed holds rates steady as Australian dollar slides on soft inflation data

The Australian dollar fell sharply on Tuesday after official data showed inflation cooling faster than economists had anticipated, undermining the case for further monetary tightening by the Reserve Bank of Australia and sending AUD/USD to its lowest level in more than two weeks.

Inflation Surprise

Australia's Consumer Price Index rose 3.8% in the 12 months to June 2026, down from 4.0% in May, according to data released by the Australian Bureau of Statistics on July 29. The monthly CPI declined 0.1%, well below market expectations of a 0.2% increase. The RBA's preferred measure of underlying inflation, the trimmed mean, rose just 0.3% month-on-month, below expectations and the prior reading of 0.4%, with the annual rate holding steady at 3.6%.fxstreet+2

The softer figures prompted a rapid repricing of interest rate expectations. David Robertson, chief economist at Bendigo Bank, said he considers it "highly unlikely" that the RBA will raise rates at its upcoming August meeting. The pair traded around 0.6935-0.6950 on Wednesday, extending losses for a third consecutive session as the currency lost a key support pillar — the prospect of further rate hikes.tradingkey+2

Fed Holds Steady as Geopolitical Risks Mount

The Australian dollar's decline deepened as the U.S. Federal Reserve held rates unchanged at 3.50%-3.75% on Wednesday in a 9-3 vote, with three dissenters favoring a quarter-point increase. The decision, announced after markets had already priced in a hawkish lean, reinforced the divergence between a potentially more cautious RBA and a still-restrictive Fed.foxbusiness+1

Geopolitical tensions between the United States and Iran have added further headwinds for the risk-sensitive currency, boosting safe-haven demand for the U.S. dollar and contributing to renewed concerns about energy-driven inflation.dailyforex+1

Outlook

Weakening commodity prices and concerns over China's industrial recovery have compounded pressure on the Australian dollar, which often serves as a proxy for Chinese growth prospects. Traders are now focused on Fed Chair Kevin Warsh's guidance on whether persistent inflation could justify tighter U.S. policy later in the year. Until domestic or external catalysts shift the balance, the currency appears vulnerable to further declines.cbsnews+2