The Reserve Bank of Australia (RBA) raised its benchmark interest rate by 25 basis points to 4.60% as expected, but the Australian Dollar (AUD) failed to gain traction against both the US Dollar and Japanese Yen following the announcement. The AUD/JPY cross dropped to an over two-week low, trading just below the 110.00 mark and down approximately 0.45% for the day, with spot prices remaining close to the monthly trough during the early European session on Tuesday [1]. Similarly, AUD/USD fell below 0.700 after the RBA decision, reflecting muted market reaction and increased selling pressure [2].
RBA Governor Michele Bullock's post-meeting press conference contributed to the AUD's weakness, as she did not reinforce expectations for further tightening and revealed that policymakers had considered holding rates due to risks in the housing market and concerns about a potentially slower global economy, including the impact of the Middle East conflict [1][2]. This dovish tone led traders to trim bets on additional rate hikes, undermining the AUD and exerting downward pressure on AUD/JPY and AUD/USD [1][2].
Meanwhile, Japanese officials, including currency diplomat Atsushi Mimura and Finance Minister Satsuki Katayama, issued warnings to markets regarding FX depreciation, and US President Donald Trump expressed concerns about the Yen's weakness to Japanese Prime Minister Sanae Takaichi at the United Nations General Assembly [1]. Hawkish expectations for the Bank of Japan (BoJ) were further supported by minutes from the BoJ's July meeting, which showed policymakers debating faster rate hikes amid mounting inflation risks. This has lifted expectations for a BoJ hike as soon as October or December, favoring JPY bulls and adding to the AUD/JPY downside [1].
ING analyst Francesco Pesole maintains a target of 0.720 for AUD/USD in December, contingent on a softer US Dollar and easier global liquidity, but acknowledges that near-term downside risks have increased due to worsening global conditions [2]. The heat map of currency movements shows the AUD was the weakest against the New Zealand Dollar today, and down 0.37% against the JPY [1].
Overall, the RBA's cautious stance and dovish signals, combined with global uncertainties and hawkish BoJ expectations, suggest that the path of least resistance for the AUD is to the downside, with any attempted recovery likely to be sold into [1][2].
CONCLUSION
Despite the RBA's rate hike, the Australian Dollar came under pressure due to dovish signals from Governor Bullock and heightened global risks. Both AUD/JPY and AUD/USD declined, with analysts highlighting increased near-term downside risks. Market sentiment remains negative for the AUD, with further weakness likely unless global conditions improve.