Australian Dollar finds fresh momentum as inflation surprises ahead of Fed decision

• The Australian Dollar gains 0.17% on Wednesday, supported by hotter-than-expected inflation data.
• Australia's annual inflation accelerated to 4.3% in September, above the 4.2% forecast.
• The Fed is expected to leave interest rates unchanged on Wednesday, with investors closely watching comments from its Chair.

AUD/USD advances on Wednesday, gaining 0.17% on the day to trade around 0.7035 at the time of writing. The Australian Dollar (AUD) benefits from hotter-than-expected inflation data in Australia, which strengthens expectations of another interest rate hike by the Reserve Bank of Australia (RBA).

According to data released on Wednesday by the Australian Bureau of Statistics (ABS), Australia's Consumer Price Index (CPI) rose 4.3% YoY in September, compared with 4% in August and market expectations of 4.2%. On a monthly basis, consumer prices increased 0.8%, also exceeding forecasts of 0.7%, following a 0.4% rise in the previous month.

Inflationary pressures also remain elevated in the third quarter, with consumer prices rising 1.3% QoQ, compared with 0.6% in the second quarter. Meanwhile, underlying inflation, measured by the Trimmed Mean CPI, increased 0.3% MoM and 3.7% YoY in September.

These figures confirm persistent inflationary pressures in the Australian economy, complicating the RBA's monetary policy outlook. As the central bank seeks to bring inflation under control, the latest acceleration in consumer prices fuels speculation about a possible interest rate hike as early as its November meeting.

The prospect of further monetary tightening supports the Australian Dollar, as investors anticipate potentially higher returns on assets denominated in the currency. This dynamic benefits AUD/USD, although upcoming US monetary policy decisions could influence the pair's direction.

In the United States (US), attention turns to the Federal Reserve's (Fed) monetary policy decision, scheduled for Wednesday. Markets widely expect the central bank to leave its benchmark interest rate unchanged within the 3.75%-4.00% range, following a 25-basis-point (bps) increase in September.

According to the CME FedWatch tool, investors assign only around a 9% chance to another rate hike at this meeting, despite persistent inflationary pressures in the US. Annual US CPI notably accelerated to 3.7% YoY in September, up from 3.4% previously. However, markets continue to anticipate another round of monetary tightening in December, which could limit losses in the US Dollar (USD) and cap further gains in AUD/USD.

Against this backdrop, comments from Fed Chair Kevin Warsh during his post-meeting press conference will be closely scrutinized. Warsh recently reiterated his commitment to price stability while emphasizing that he does not want to prejudge upcoming monetary policy decisions.

Investors will therefore look for clues on whether the Fed intends to continue its monetary tightening cycle before the end of the year. A more hawkish tone could support the US Dollar, while a more cautious message could allow AUD/USD to extend its advance, as expectations of higher Australian interest rates continue to favor the Aussie.

AUD/USD technical analysis

In the one-hour chart, AUD/USD trades at 0.7037, holding a modest bullish bias as it stays above the 100-period simple moving average (SMA) at 0.7026 and the 200-period SMA at 0.7010, with the rising trend-line support tracking near 0.7020. The Relative Strength Index (14) hovers around 56, pointing to steady but not overstretched upside momentum while the pair consolidates just under near-term resistance.

On the topside, immediate resistance is located at the horizontal barrier around 0.7040, followed by 0.7055 and then 0.7075, where supply is likely to thicken if the advance extends. On the downside, initial support is seen at the 100-period SMA near 0.7026, ahead of the trend-line region around 0.7020, with the 200-period SMA at 0.7010 offering a deeper cushion should intraday buyers step back.

(The technical analysis of this story was written with the help of an AI tool. Know more.)