The Australian dollar slipped to around $0.72 but remained close to four-year highs, as the federal budget and rising inflation risks linked to the protracted conflict in the Middle East kept expectations of further interest rate increases in place. The 2026/27 budget projected narrower deficits and introduced significant changes to housing tax settings, yet largely left the task of containing inflation to the Reserve Bank of Australia.
Money markets are still pricing in roughly a 20% chance of a June hike in the cash rate to 4.35%, while the implied probability of an August move to 4.6% has climbed above 80%. Recent data had little effect on this outlook: wage growth for the first quarter met expectations, and while the annual pace eased slightly, it remained consistent with elevated labor cost pressures, underscoring the persistence of inflation.
At the same time, global energy prices stayed high, as efforts to negotiate an end to the US-Iran war have shown little progress and shipping through the Strait of Hormuz remains heavily constrained amid ongoing naval tensions.
