AUD/USD rebounds ahead of RBA rate call, US Dollar strength weighs

• AUD/USD rebounds modestly ahead of the RBA's interest rate decision.
• Markets price a 70-75% chance of a 25 bp RBA hike as inflation remains sticky.
• US data and Fed leadership shift lift the Greenback.

The Australian Dollar (AUD) rebounds against the US Dollar (USD) on Monday, with AUD/USD trimming earlier losses despite a broadly firmer Greenback, as traders reposition ahead of the Reserve Bank of Australia (RBA) interest rate decision due on Tuesday.

At the time of writing, AUD/USD is trading around 0.6942, recovering from an intraday low near 0.6908.

Markets now widely expect the RBA to raise interest rates by 25 basis points to 3.85%, with futures markets pricing around a 70-75% chance of a hike. Expectations are being underpinned by persistent inflation pressure, with core inflation — the RBA’s preferred trimmed-mean measure — rising to 3.4% YoY in the fourth quarter, well above the central bank’s 2-3% target band.

Meanwhile, a tight labour market, with the unemployment rate hovering around 4%, is further supporting the case for tighter monetary policy.

On the data front, figures released earlier in the day showed that Australia’s TD-MI Inflation Gauge rose to 3.6% YoY in January, up from 3.5%. Attention also turned to China, a key driver for the Australian Dollar, as it is Australia’s largest trading partner. China’s RatingDog Manufacturing PMI came in at 50.3 in January, matching expectations and edging up from 50.1 previously.

In the United States (US), the US Dollar is drawing support after the nomination of former Federal Reserve (Fed) Governor Kevin Warsh as the next Chair of the Fed, prompting investors to reassess the US monetary policy outlook. Warsh is widely viewed as an inflation hawk, leading markets to dial back expectations for aggressive rate cuts driven by political pressure.

Further support comes from upbeat US manufacturing data, with the Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) rising to 52.6 in January from 47.9 in December, beating market expectations of 48.5. The S&P Global Manufacturing PMI also edged higher to 52.4 from 51.9.

The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is trading near 97.63, its highest level in about a week.

However, the Greenback could face near-term headwinds after the US entered a partial government shutdown on Saturday, as a midnight funding deadline passed without approval from the US Congress for the 2026 budget. As a result, the Bureau of Labor Statistics (BLS) said the January employment report due on Friday will be delayed.