Australian Dollar slides to 10-month low as Fed tightening bets gather pace

• Australian Dollar falls to its lowest level since January as risk aversion and a stronger US Dollar weigh on the pair.
• Hawkish Fed remarks and stronger US inflation reinforce expectations of further interest rate hikes.
• The RBA signals a potential pause in tightening after raising interest rates to 4.85% last week.

AUD/USD extends losses on Thursday, slipping to its lowest level since January as investors turn to the US Dollar (USD) for safety. Hawkish Federal Reserve (Fed) expectations lend further support to the Greenback. At the time of writing, the pair trades around 0.6808, down 0.60% on the day.

US technology shares came under pressure after reports that Nvidia CEO Jensen Huang had resigned, helping the US Dollar recover from a modest intraday dip. Investors also grew more cautious after US President Donald Trump said on Truth Social that the US does not need a deal with Iran.

The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, climbs to a fresh year-to-date high of 103.19.

On the monetary policy front, traders fully price in a December Fed hike, with a 25-basis-point (bps) move favoured and a small chance of a larger 50 bps increase. Markets also expect further tightening into 2027 as more Fed officials call for higher rates to bring inflation under control.

Cleveland Fed President Beth Hammack said on Thursday that policy needs to become restrictive to lower inflation. She favours smaller moves but said a larger hike could be needed if the Fed falls behind. Earlier this week, Dallas Fed President Lorie Logan and Philadelphia Fed President Anna Paulson also backed further tightening.

Before Tuesday’s US inflation report, Fed Governor Christopher Waller said a monthly core inflation reading around 0.3% could put a half-point December hike on the table. Core inflation came in at 0.3%, above the 0.2% forecast.

In contrast, the Reserve Bank of Australia (RBA) has signalled it may pause after raising its cash rate by 25 basis points to 4.85% last week, its fifth hike this year. The RBA dropped its explicit reference to further hikes, and Governor Michele Bullock said it was time to assess how the economy was responding to higher borrowing costs.

Australia’s consumer inflation expectations held steady at 5.3% in November, well above the RBA's 2%-3% inflation target range. The Melbourne Institute survey measures how much households expect prices to rise over the next 12 months. Traders now turn to Friday’s US Producer Price Index (PPI) for the next read on inflation.