The Australian dollar traded just below $0.72, hovering near its highest level since early June, as a global bond selloff kept investors on edge. Mounting concerns over US budget deficits and rising debt levels pushed Treasury yields higher, while Australian markets came under pressure from expectations that interest rates may need to remain elevated for longer to rein in inflation.
Money markets now assign a 54% probability to a 25-basis-point rate hike by the Reserve Bank of Australia to 4.60% at its September 29 meeting, up sharply from just 10% a week earlier. The implied probability of a further increase to 4.85% stands at 40%.
These firmer rate-hike expectations have emerged despite recent data signaling a loss of economic momentum, with net exports and government spending indicating that growth slowed in the second quarter. Investors are now focused on the Q2 GDP figures due Wednesday, with economists forecasting quarterly growth of only 0.3% and an easing in annual growth to 1.8% from 2.5%.
Even so, core inflation remains elevated at 3.6%, sustaining pressure on the RBA to consider tightening policy further.
