Australian Dollar softens to near 0.7000 on hawkish Fed signals, RBA rate decision looms
- AUD/USD weakens to around 0.7010 in Monday’s early Asian session.
- Fed’s Hammack wanted restrictive monetary policy to bring inflation to target.
- The RBA is poised to resume raising interest rates at its September meeting on Tuesday.
The AUD/USD pair loses momentum to near 0.7010 during the early Asian session on Monday. The US Dollar (USD) strengthens against the Australian Dollar (AUD) on rising US Treasury yields and growing bets on further Federal Reserve (Fed) interest rate hikes. The Reserve Bank of Australia (RBA) will be in the spotlight later on Tuesday.
Hawkish remarks from Fed officials have fueled speculation about additional interest rate increases following a recent rate hike to the 3.75%-4.00% range. Cleveland Fed President Beth Hammack said on Friday that she is worried that persistently high inflation risks conditioning the American public to accept elevated prices as the norm, adding the central bank cannot let that happen.
Meanwhile, Philadelphia Fed President Anna Paulson said, "Some modest further tightening may be warranted.” Markets are now pricing in nearly a 65.9% chance of a Fed October benchmark rate hike, up from 57.6% a week earlier and 9.4% a month earlier, according to the CME FedWatch tool.
The RBA is likely to deliver a 25 basis points (bps) rate hike to combat sticky inflation. That would bring the Official Cash Rate (OCR) to 4.60%, the highest level since November 2011. Traders will take more cues from Governor Michele Bullock’s press conference after the rate decision whether the Australian central bank is prepared to deliver back-to-back hikes in November or prefers to watch and wait through the rest of the year.
“The risk sits with the need to tighten monetary policy further beyond September given the inflation backdrop,” said Belinda Allen, head of Australia Economics at Commonwealth Bank of Australia. “But it is not an easy decision to push monetary policy further into restrictive territory,” Allen added.
AUD resilience underpinned as RBA tightening odds rise despite softer jobs headline
Brown Brothers Harriman’s Elias Haddad notes that Australia’s latest labour force data delivered a mixed signal, with the “unemployment rate unexpectedly rose 0.1ppt to 4.6%, which was above consensus and RBA year-end projection of 4.5%.” However, BBH stresses that “the increase in the jobless rate largely reflects a higher participation rate suggesting some tightness in the labor market persists,” reinforcing the view that underlying conditions remain firm.
Against this backdrop, Haddad argues that the “bottom line: rising odds of additional RBA hikes limits policy divergence with the Fed and supports AUD/USD.” He also highlights that “Australia’s strategic exposure to commodities linked to energy, AI, and defense remains an important long-term tailwind for AUD,” providing an additional structural underpinning for the currency beyond the near-term policy outlook.
Hammack flags inflation mindset risk, keeps Fed tone firmly hawkish
Fed’s Hammack delivered a moderately hawkish message, with a 7.2/10 FXS Speechtracker score that is slightly softer relative to the historical average of 7.5/10 but still clearly above neutral. The emphasis on the “biggest risk” being the formation of an inflationary mindset, alongside comments that growth is holding up and the job market is stable, underscores concern that persistent above-target inflation and ongoing capital expenditure could entrench price pressures. The warning that policy must remain at a restrictive stance if progress on inflation stalls reinforces a bias toward keeping rates elevated for longer, supporting the Dollar on balance.
The FXS Fed Sentiment Index slipped by 0.34 points to 147.72, indicating a modest pullback in perceived hawkishness even as the index remains deep in hawkish territory above the 100 neutral line. This configuration—high level but negative change—suggests the Fed is still firmly skewed toward restrictive policy, yet markets may interpret Hammack’s tone as marginally less aggressive compared to the established baseline.
Technical Analysis: AUD/USD keeps a bearish vibe in the near term
In the daily chart, AUD/USD holds below the 100-day simple moving average (SMA) and the Bollinger middle band, keeping the near-term bias bearish despite a modest intraday bounce off recent lows. Price is only marginally above the Bollinger lower band support, while the Relative Strength Index (RSI) at 33 is hovering near oversold territory, suggesting selling pressure is stretched but not yet reversed.
On the topside, initial resistance is seen at the 100-day SMA around 0.7070, with the next cap at the Bollinger middle band close to 0.7130, ahead of the upper band near 0.7265. On the downside, a clear break below the Bollinger lower band at 0.7000 would open the door to further downside extension, while recovery attempts are likely to remain fragile as long as price trades under the 100-day SMA.
(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.