AUD: Shallow Upside Risk Until Next Year - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, noted that AUD/USD is currently on the defensive, with the Australian dollar the weakest G10 currency on the day. Despite cooling market expectations for further tightening by the Reserve Bank of Australia, the bank still expects one more rate hike from the RBA this year, providing policy support for the Australian dollar's trajectory ahead.

**AUD Under Short-Term Pressure, But Fundamentals Don't Support 'High-Risk' Label**

Foley said the recent volatility in the Australian dollar is tied both to shifting RBA policy expectations and the currency's traditional role as a "high-risk" G10 currency, which has made it fall out of favor during this bout of market turbulence. However, she emphasized that given Australia's sound fundamental backdrop, this "high-risk" designation is no longer justified. Rabobank maintains its 6-month AUD/USD forecast at 0.70 and continues to see the Australian dollar rising to 0.68 within three months. AUD/USD is currently trading near 0.71195, still above the bank's target range, suggesting the short-term correction has yet to alter the medium-term modest uptrend.

**Inflation and Central Bank Stance Are Key Variables Ahead**

Earlier, Australia's Q2 CPI inflation data dashed market expectations for an RBA rate hike at the August policy meeting, sending the Australian dollar lower. However, RBA Governor Bullock stated that the board remains vigilant to upside inflation risks and will not hesitate to raise rates if necessary. Rabobank has not revised its Australian dollar forecasts this week, and on a short-term strategy basis prefers buying AUD/EUR, expecting EUR/AUD to fall back below 1.66. Market pricing for further RBA rate hikes this year remains divided, and if inflation data firms, rate hike expectations could re-emerge and support the Australian dollar.