RBA’s Pause Isn’t the Endgame.

The Reserve Bank of Australia held rates for a second consecutive month, but I still think there is a chance the bank will hike one last time in September on the back of an inflation surprise.

USD: Still fighting for direction.We have recently made the case for the dollar to stay “trapped” in a situation where FX volatility fails to pick up, leaving room for carry trades to keep supporting high-yielders and weigh on funding currencies. The greenback probably needs some compelling evidence against the soft-landing narrative in the coming days to break lower.

One data release that went slightly under the radar yesterday, but in our view contained key forward-looking information, was the Federal Reserve’s Senior Loan Officer Opinion Survey. As discussed by ING US economist here, the survey pointed at a further tightening in US lending conditions and how both households and businesses are now warier about taking on additional borrowing. Given the centrality of credit flow to the US economy, this increases the probability of a faster return to target inflation.

Outside of the US, China continued to print disappointing data: the latest being July’s Caixin PMI manufacturing, which fell more than expected into contraction territory (49.2). This has set the stage for a risk-off-leaning environment in FX this morning, which can favour some modest dollar recovery into the US data releases and help DXY consolidate above 102.00, before facing harder data-related tests.

EUR: Markets too dovish?Monday’s set of data releases in the eurozone showed the growth and inflation side moving in diverging directions. The euro area grew slightly more than expected, at 0.6% year-on-year (0.3% quarter-on-quarter) in the second quarter, while inflation slowed in line with consensus from 5.5% to 5.3% in July. Core inflation was, however, unchanged at 5.5%.

The most interesting dynamic in inflation, and one that the ECB will likely follow closely, is related to service price pressure. While goods inflation continues to ease, service price pressure has kept mounting in line with wage growth and stronger demand.

In my view, yesterday’s figures leave the door open for another hike by the ECB before the end of the year, even in September. Markets, however, remain reluctant to endorse this scenario and only price in 17bp of tightening by December, likely having read last week’s ECB messaging as a dovish tilt. It is possible investors will want to hear more hawkishness from ECB members before aligning with the data’s indications and fully price in another hike. However, August is a quiet month for ECB speakers: we’ll hear from the dove Fabio Panetta later this week, and that will hardly help. EUR/USD should be primarily driven by the dollar leg and US data for the remainder of the week, and there are some downside risks to the 1.0900 handle.

AUD: RBA can still hike in September.As already expected, the Reserve Bank of Australia (RBA) kept rates on hold today, defying consensus expectations. The Bank pointed out how higher interest rates are “working to establish a more sustainable balance between supply and demand in the economy” and opted for a pause to better assess incoming data. The new CPI forecasts now see inflation declining to 3.25% by the fourth quarter of next year and fall back into target by the end of 2025. This is probably a dovish signal, as it implies the current pace of tightening is appropriate to take inflation back to target in an acceptable timeframe. However, the RBA has shown elevated sensitivity to data, and I doubt this will change very soon: another high inflation read may well convince it to add a hike before the peak. My base case is still for one last 25bp increase to be delivered in September when electricity tariffs could deliver an inflation surprise. AUD may underperform other peers like the NZD and the Scandies until a bullish “pocket” emerges in September, should the RBA go ahead with one last hike.

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