Australian Dollar softens on hawkish Fed outlook
- AUD/USD weakens to around 0.7115 in Tuesday’s Asian session.
- Hawkish Fed signals provide some support to the US Dollar.
- RBA is expected to hike rates next week.
The AUD/USD pair loses ground to near 0.7115 during the Asian trading hours on Tuesday. The US Dollar (USD) strengthens against the Australian Dollar (AUD) as the Federal Reserve (Fed) raised interest rates to 3.75%–4.00% and hinted at further hikes before year-end. Traders brace for the Fedspeak later on Tuesday for fresh impetus.
Hawkish remarks from Fed officials reinforced expectations for further interest rate hikes, supporting the Greenback. Chicago Fed President Austan Goolsbee said on Monday that the central bank cannot overlook repeated and persistent supply shocks, while St. Louis Fed President Alberto Musalem stated that additional rate increases may be necessary to achieve the Fed’s inflation target.
Traders are now pricing in nearly a 55.4% probability for a rate hike of at least 25 basis points (bps) at the Fed's October meeting, according to the CME FedWatch tool, up from 43.5% a week earlier.
On the Aussie front, the Reserve Bank of Australia (RBA) is likely to raise its key interest rate next week as surging energy prices crystallise upside risks to inflation, Bloomberg Economics said, warning of a possible further hike in November.
Money markets are pricing in about a 90% chance the RBA will hike by a quarter-percentage point to 4.6%next week, according to Bloomberg.
RBA hike odds climb as OIS market prices in aggressive move
Analysts at Commerzbank point out that rate expectations have shifted decisively ahead of next week’s RBA meeting, with the bank noting that the “RBA’s OIS market is now pricing in 85% chance of a 25bp hike during next week’s monetary policy board meeting.” They suggest this elevated probability underscores the market’s conviction that the RBA is leaning toward further tightening, reinforcing support for the Australian Dollar into the decision.
Technical Analysis: AUD/USD maintains a constructive outlook in the near term
In the daily chart, AUD/USD holds above both the Bollinger Bands lower band and the 100-day simple moving average (SMA), which collectively underpin a constructive near-term tone. Price remains below the Bollinger middle band, suggesting the advance is still capped by overhead supply, while the Relative Strength Index (14) at 47 stays near neutral, hinting at consolidative rather than impulsive momentum.
On the topside, initial resistance emerges at the Bollinger middle band around 0.7160, ahead of a higher barrier at the Bollinger upper band near 0.7235. On the downside, immediate support is seen at the lower Bollinger band at 0.7085, followed by the 100-day SMA at 0.7075, where a deeper pullback would be expected to attract dip-buying interest as long as these underlying levels hold.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.