Australian Dollar holds near one-month highs with CPI and Fed in focus

• AUD/USD edges higher despite a firmer US Dollar as hawkish RBA expectations support the Aussie.
• Australian inflation data on Wednesday could strengthen expectations of another RBA rate hike.
• Traders also await RBA Governor Bullock’s testimony and the Fed interest rate decision.

AUD/USD edges higher on Tuesday as hawkish Reserve Bank of Australia (RBA) expectations help the Australian Dollar (AUD) outperform its major peers. A recovery in equity markets as concerns over heavy AI spending subside also supports the risk-sensitive Aussie, although a firmer US Dollar (USD) limits the pair’s upside. At the time of writing, AUD/USD trades around 0.7027, near one-month highs.

Traders now look ahead to Australia’s inflation data and RBA Governor Michele Bullock’s parliamentary testimony on Wednesday. Both events could shape expectations for the RBA’s November interest rate decision, while the Federal Reserve’s (Fed) monetary policy announcement later that day adds another key test for the pair.

Australia’s headline Consumer Price Index (CPI) is expected to rise 0.7% in September, up from 0.4% in August, taking the annual rate to 4.2% from 4.0%. Third-quarter inflation is forecast to accelerate to 1.3% from 0.6% in the second quarter.

Traders will also closely watch trimmed mean inflation for signs of underlying price pressure. The monthly measure is expected to rise 0.3% in September after increasing 0.2% in August.

Brown Brothers Harriman’s Elias Haddad notes that the upcoming inflation prints “would leave inflation above the RBA’s year-end forecasts of 3.6% for headline and 3.3% for trimmed mean,” reinforcing Deputy Governor Andrew Hauser’s recent warning that the inflation outlook is “materially worse” than assessed in August. BBH adds that “firmer inflation would also strengthen the case for a back-to-back 25bps RBA cash rate hike to 4.85% at the next November 3 meeting (70% pried in) and widen AUD’s yield advantage.”

Meanwhile, the US Dollar extends its rebound following recent weakness, when AI-related equity jitters drove investors toward government bonds and pushed Treasury yields lower. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 102.25, near two-week highs.

The recovery comes as traders reposition ahead of Fed interest rate decision. Policymakers are widely expected to leave rates unchanged at 3.75%-4.00% after raising them by 25 basis points (bps) in September, putting the focus on the policy statement and Chair Kevin Warsh’s press conference.

With inflation running above the Fed’s 2% target, traders will assess whether policymakers reinforce or temper expectations of a December rate hike, currently priced at around 80%, according to the CME FedWatch Tool.