Australia inflation amid Iran war oil shock, rate hike likely

Australia’s inflation has jumped to 4.6%, largely driven by the Iran war’s impact on global oil prices, making a rate hike by the Reserve Bank next Tuesday more likely. The odds of the Fed cutting rates by 50+ bps after its June meeting sit at a paltry 4.2% YES.

The spike in Australian inflation reflects global inflationary pressure from the Iran conflict. The market for a Fed decision in June shows little confidence in a rate cut, at 4.2% YES for a 25 bps cut. The July market is much higher, at 86.5% YES for no change. Traders appear convinced that inflation concerns will keep the Fed hawkish through at least mid-summer.

Volume in the June market is modest: $45,593/day face value, translating to $2,646 in actual USDC traded daily. It takes $5,970 to move the odds 5 percentage points, a relatively firm market. The biggest move was a 46-point spike, showing that while large orders can jolt the price, the market quickly corrects.

Persistent inflation and energy market disruptions make it unlikely the Fed will pivot to cuts soon. At 4.2¢, a YES share on a 25 bps cut in June offers a 23.8x return, but you’d need to bet against the current inflation narrative for that to pay off. The odds of the Fed holding rates after the July meeting at 86.5% YES suggest traders expect inflation to remain the dominant concern.

Watch for upcoming FOMC communications and any shifts in oil price trends. Jerome Powell’s next statements could signal changes in the Fed’s inflation outlook and rate strategy.

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