The Australian Dollar (AUD) softened against the US Dollar (USD), with the AUD/USD pair losing momentum to near 0.7010 during the early Asian session on Monday, as the US Dollar strengthened on rising US Treasury yields and increased expectations of further Federal Reserve (Fed) interest rate hikes [1]. Hawkish remarks from Fed officials, including Cleveland Fed President Beth Hammack and Philadelphia Fed President Anna Paulson, have fueled speculation about additional rate increases following a recent hike to the 3.75%-4.00% range. Hammack expressed concerns about persistently high inflation conditioning the public to accept elevated prices, while Paulson stated that "some modest further tightening may be warranted" [1]. Market participants are now pricing in 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 [1].
Attention is now turning to the Reserve Bank of Australia (RBA), which is expected to deliver a 25 basis points (bps) rate hike, potentially bringing the Official Cash Rate (OCR) to 4.60%, the highest level since November 2011 [1]. Traders are awaiting cues from Governor Michele Bullock’s press conference after the rate decision to gauge whether the RBA is prepared for back-to-back hikes in November or will adopt a wait-and-see approach for the remainder of the year [1]. Commonwealth Bank of Australia’s Belinda Allen noted the risk of needing to tighten monetary policy further beyond September due to the inflation backdrop, but highlighted the difficulty in pushing policy further into restrictive territory [1].
Australia’s latest labour force data showed the unemployment rate unexpectedly rose 0.1 percentage points to 4.6%, above consensus and the RBA’s year-end projection of 4.5%. However, Brown Brothers Harriman’s Elias Haddad pointed out that the increase largely reflects a higher participation rate, suggesting persistent tightness in the labor market and reinforcing the view that underlying conditions remain firm [1]. Haddad argued that rising odds of additional RBA hikes limit policy divergence with the Fed and support AUD/USD, while also noting Australia’s strategic exposure to commodities linked to energy, AI, and defense as a long-term tailwind for the currency [1].
Overall, the market is reacting to the interplay between hawkish Fed signals and expectations for RBA tightening, with the AUD showing resilience despite softer jobs data, underpinned by structural factors and the prospect of further rate hikes [1].
CONCLUSION
The Australian Dollar is under pressure from hawkish Fed signals and rising US rate hike expectations, but remains supported by the likelihood of further RBA tightening and strong structural fundamentals. Market participants are closely watching the upcoming RBA rate decision and Governor Bullock’s comments for guidance on future policy moves. The interplay between US and Australian monetary policy continues to drive AUD/USD volatility.