The Aussie fell to a four week low, with the Fed's hawkish rate hike driving broad based US dollar strength that overshadowed expectations for further RBA tightening. Elevated Middle East tensions kept oil prices supported, adding a further layer of risk, even as Saudi efforts to restore pipeline capacity offered some relief.
Locally, data was limited, with the only key event being RBA communications earlier in the week. Assistant Governor Sarah Hunter,speaking at a fireside chat stressed that inflation risks remain skewed to the upside, citing rising fuel prices stemming from the unresolved Middle East conflict and a global surge in chip demand tied to the AI boom that is pushing up consumer electronics prices.
Hunter also flagged persistently weak productivity growth as a concern.On the domestic front Hunter reiterated that the housing market correction is unfolding broadly as expected and that household and business balance sheets currently show no signs of systemic stress.
Governor Michele Bullock echoed similar concerns in testimony before the House of Representatives on Friday, noting that upside risks flagged at the August Board meeting are increasingly materialising. She pointed to the Middle East conflict, the AI boom, and extreme weather events as global forces adding to inflation pressures, with oil prices in particular adding directly to the outlook.
Bullock also stated that liaison with firms suggests many are passing on higher input costs, and while this was expected, she stressed it is important these effects don't become embedded into broader price and wage setting decisions, which could otherwise demand a stronger policy response. She also noted that domestic capacity pressures remain despite a gradual easing in labour market conditions.
Looking ahead, the focus turns to the August labour force survey due Thursday, the last key release before the RBA meets Tuesday week, with August CPI data due a day after. We expect a solid rebound in employment following July's 15.8k fall, forecasting around 28k jobs added,while the unemployment rate should ease back to 4.4% from 4.5%.
A much stronger labour force print could see market pricing for a September hike firm further, with markets currently pricing an 80%probability of a move at that meeting. We don't see the case for tightening this month, with our base case remaining just one more hike in November 2026.
The week was dominated by three key central bank meetings, from the Fed, the BoE, and the BoJ, though the Fed's decision was by far the most consequential for markets.
The Fed raised rates by 25bp to 3.75-4.00%, a unanimous decision under Chair Warsh and in line with consensus. The statement was brief,describing activity as solid but inflation and uncertainty as still elevated,framing the hike as accelerating the path to target rather than a shift in strategy. The dot plot carried the real signal. The median still points to one more hike this year with no cuts through 2027, but the distribution beneath it was more hawkish, with eight of 18 participants seeing the funds rate at 4.25 to 4.50% by end 2027. Notably, this hawkish shift came despite inflation forecasts barely moving from June, with growth and employment projections actually ticking higher, suggesting the Committee sees little cost to further tightening.
Warsh offered little forward guidance, again declining to submit his own dot, though he reiterated that inflation remains too high. Given the hawkish tone and wider dot distribution, we now expect one more hike in December. Markets currently price around 40% odds of an October move,though we don't expect the Fed to act that early.
Attention then turned to the Bank of England, who voted 6-3 to hold rates at 3.75%, in line with expectations, though it flagged inflation risks skewed to the upside despite limited evidence of second round effects so far. Governor Bailey signalled tightening may be needed should the Middle East conflict persist, as growth and inflation forecasts were both revised higher, with inflation now seen topping 4% in early 2027. Policy now hinges largely on how the conflict evolves.
The Bank of Japan raised rates to 1.25%, matching market pricing and marking its highest level since 1995. The 7-2 vote was wider than a clean hawkish consensus would suggest, with two dissenters arguing inflation hasn't accelerated enough to justify tightening, even as core CPI slowed to 1.7% YoY in August. Notably, two other board members pushed back from the opposite direction, arguing underlying inflation already justifies a faster pace. The yen sold off post announcement, reflecting doubts overboard unity. We expect further quarterly hikes, reaching a neutral rate near 1.75% by Q1 2027.
Turning to the Middle East, Brent crude ended the week largely unchanged, easing slightly late on as Saudi Arabia said it expects to restore around half its damaged pipeline capacity within days. Supply remains tight overall, with delays facing Saudi crude buyers in Europe driving up other regional crude grades. Elsewhere, fighting between Yemen's Houthis and opposing forces has escalated as the group consolidates control of Yemen's Red Sea coast, while tensions between Iran and the US are also rising, with Trump telling Axios he is nearing a decision on whether to escalate attacks on Iran ahead of next week's meeting with Persian Gulf leaders.
