Aussie Rallies on Sticky CPI as Brent Falls on Hormuz Diplomacy

The dollar barely moved after July PCE inflation landed almost exactly where markets expected. Core PCE rose 0.2% month on month and 3.3% year on year, matching consensus. Headline inflation ran slightly above forecasts. Personal income and spending both beat expectations. None of the numbers were far enough from the mark to reopen the Fed debate.

Fed funds futures continued to show about 63% probability of a September hold, with odds of at least one hike by year-end near 70%. The dollar strengthened modestly against sterling and the Swiss franc, held broadly steady against the euro and yen, and stayed weak against a much stronger Aussie.

Attention shifts to Fed Chair Kevin Warsh at Jackson Hole on Friday, where remarks on inflation, Fed independence and the Treasury-Fed relationship have greater potential to move the dollar and cross-asset markets than Wednesday's largely in-line data.

The Australian dollar has a much clearer domestic catalyst. July CPI slowed from 3.8% to 3.5% year on year, but still exceeded the 3.2% consensus. The RBA's preferred trimmed-mean CPI held at 3.6% against expectations for mild easing, while the monthly trimmed mean accelerated to 0.5%. Services inflation also strengthened, leaving a stickier domestic inflation signal beneath the softer headline rate.

August RBA minutes explicitly discussed pre-emptive tightening if upside inflation risks began to crystallize. July CPI is also the final monthly inflation report available before the Sept. 28-29 meeting, with the next CPI release arriving Sept. 30. Some analysts now put the chance of a September hike at around 30-40%, while still expecting the Board may prefer to wait for GDP and fresh labour-market data. Others see another hike before year-end as highly likely, while a more dovish camp still expects no further tightening. The Aussie's strength reflects that reopened debate: September is not settled, but it is credible again.

Brent crude extended its decline below $86 after Iran and Oman issued a joint statement describing a proposed temporary navigational corridor through the Strait of Hormuz and a joint project to clear mines, with technical negotiations continuing toward a more permanent arrangement. Unlike earlier mediation headlines, this gives markets a specific mechanism through which shipping conditions could eventually improve.

Physical disruption has not disappeared. Preliminary Kpler data showed only five commodity vessels passing through Hormuz on Tuesday, well below the already-depressed 10-day average of 15. Brent is therefore falling not because tanker traffic has normalized, but because markets are pricing a more credible route toward future normalization. The war premium is shrinking even while current physical disruption remains severe.

US sanctions are reinforcing that repricing from another direction. Washington has so far stopped short of imposing secondary sanctions on major Chinese financial institutions facilitating Iranian trade. Treasury Secretary Scott Bessent defended that restraint by asking, "why would I want to blow up the global financial system," describing the current approach as a cure period before potentially tougher action. That leaves the sanctions campaign below its maximum-pressure potential while China, buyer of roughly 90% of Iranian oil exports, remains the central enforcement constraint. Beijing has warned it will defend its interests if pressure intensifies. Combined with firmer diplomacy around Hormuz, that is pulling geopolitical premium out of Brent even though underlying supply flows are still constrained.

The market hierarchy is unusually clear. PCE did not move the dollar. Australian CPI did move the Aussie. Diplomacy is moving oil more than either. FX markets are largely waiting for Warsh. Brent is already repricing what a less escalatory Middle East path could look like.