The Australian dollar surged to a four-week peak of US66.07¢ following a surprisingly high quarterly inflation report. The robust data led bond traders to significantly reduce their expectations of further interest rate cuts this year. Current market pricing indicates only a slim 4 per cent probability of an easing at the upcoming Reserve Bank policy meeting next week. Money markets now fully anticipate the next rate adjustment will occur in May.
The yield curve flattened as bond yields responded to the inflation news. The policy-sensitive three-year government bond yield rose by 8 basis points, reaching 3.54 per cent. Simultaneously, the 10-year government bond return increased by 4 basis points, settling at 4.21 per cent. These movements reflect the market’s reassessment of the Reserve Bank’s monetary policy trajectory in light of the hotter-than-expected inflation figures.