Central Bank Watch: Warsh Leads Fed Race; RBA Hikes Back on Table

Currency markets are grappling with divergent monetary policy paths as leadership uncertainty clouds the Federal Reserve's outlook, while a nasty inflation surprise in Australia upends the dovish consensus for the RBA.

The Fed Chair Sweepstakes

Market pricing via Polymarket now positions former Fed Governor Kevin Warsh as the clear frontrunner to replace Jerome Powell, overtaking former favorite Kevin Hassett. Analysts at China Merchants Bank note that Warshs selection would likely signal a “reformist” but independent Fed. Warsh has historically criticized “data dependency” and excessive QE, suggesting he might shrink the balance sheet more aggressively.

While Treasury Secretary Bessent hinted at an announcement by late January, the possibility of a Warsh tenure is providing structural support to the US Dollar, despite near-term noise.

Aussie Inflation Shock

Meanwhile, the Australian Dollar (AUD) saw volatility after the TD-Melbourne Institute Inflation Gauge accelerated sharply to 3.5% YoY in December. The monthly annualized jump to 1.0% was driven by the rollback of energy subsidies and rising rents.

This data flatly contradicts the RBA's “wait and see” approach. Markets are rapidly repricing the probability of a rate hike. If official CPI confirms this, the AUD/USD could see a decoupling from broader risk sentiment.

Key Data Snapshots

• Inflation Gauge: 3.5% YoY (December)
• Monthly Acceleration: 1.0% (Annualized)
• Fed Announcement Timeline: Late January