• GBP/AUD down 1.0%
• As Aus inflation strength surprises
• Boosts RBA rate hike expectations
• Cements AUD outperformer status

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The Australian Dollar jumped against the Pound and all other major currencies following the release of stronger-than-expected inflation data midweek.

Financial markets raised bets the Reserve Bank of Australia (RBA) would have to raise interest rates more aggressively after Australian CPI inflation rose 7.8% in the year to Q4 from 7.3% previously, beating expectations for a rise of 7.5%.

This after inflation rose 1.9% in the final quarter, ahead of expectations for 1.6% and a step up on Q3's 1.8%.

"The Aussie dollar rolled to 5-month highs after red-hot domestic inflation – and the highest in 3 decades – put a Reserve Bank of Australia interest rate hike next month more firmly on the table," says Joe Manimbo, Senior FX Analyst at Convera.

The trimmed mean reading - to which the RBA pays close attention - rose 1.7% quarter-on-quarter, ahead of 1.5% expected.

"Trimmed mean inflation was well above the central bank’s expectation of 6.5% YoY. So, the RBA's preferred measure of core inflation is running well above its forecast, which will concern the central bank as it could be signalling more persistent inflation than it anticipated," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

The ABS said the largest drivers of inflation were domestic holiday travel & accommodation (+13.3%), electricity (+8.6%), and international holiday travel & accommodation (+7.6%).

"Australia’s CPI data showed momentum continued to build in domestically driven inflationary pressures in Q4. This cements a 25bp cash rate hike in February and supports our view of another 25bp hike in March," says ANZ Economist Catherine Birch.

The stronger inflation data saw expectations for the RBA pausing its rate hiking cycle on February 08 falling and approximately 65bp of total additional tightening is now priced for the RBA, taking a peak policy rate to near 3.75%.

The Australian Dollar remains 2023's best-performing currency, aided by a reopening of the Chinese economy, strong commodity exports and a robust domestic economy that is consistent with higher interest rates at the RBA.

The Pound to Australian Dollar exchange rate (GBP/AUD) fell to 1.7329 on the developments, taking bank account international payment rates to around 1.6844, cash and holiday money rates at competitive providers to approximately 1.7173. Competitive money transfer providers are quoting approximately 1.7277.

The Aussie was also higher by half a percent against the U.S. Dollar at 0.7080 but had earlier printed new 5-month highs at 0.71224.

Above: GBP/AUD at daily intervals. Consider setting a free FX rate alert here to better time your payment requirements.

"The Australian inflation data makes a 25bp rate hike by the RBA in February highly likely vs market expectations before the data of less than a 60% chance," says Marinov.

"The upside surprise in trimmed mean inflation will have the market re-thinking the peak in the RBA’s cash rate, which has been brought down from over 4% in H222 to 3.6% currently. We continue to expect a peak in the cash rate of 3.6%, but the market may begin to push that rate higher again on the back of higher core inflation, which will provide some underlying support for the AUD," he adds.

2023's top-performing major currency can continue to deliver upside against the Pound and U.S. Dollar according to analysts who believe a strong economy will receive additional support from China's improved growth potential.

"Aussie data supports our long AUD view," says Thomas Flury, Strategist at UBS.

The analyst says the view is emboldened by recent figures that reveal inflation is running hot and consumers remain willing to spend.

Data showed retail sales rose 1.4% month-on-month in November, far ahead of expectations for 0.6% growth while previous estimates were revised materially higher.

"These data have strengthened expectations of another 25 bps rate hike from the RBA next month and pushed back of talk that the central bank could be on the cusp of a policy pause," says Jane Foley, Senior FX Strategist at Rabobank.