Australian Dollar weakens below 0.7150 as markets brace for Fed rate decision
- AUD/USD drifts lower to near 0.7120 in Wednesday’s Asian session.
- Fed is widely expected to raise its interest rate on Wednesday for the first time in three years.
- Markets are currently pricing in a 78% chance of an RBA rate hike at the late September meeting.
The AUD/USD pair declines to around 0.7120 during Asian trading hours on Wednesday. Expectations of a US interest rate hike provide some support to the US Dollar (USD) and act as a headwind for the pair. Traders brace for the US Federal Reserve (Fed) interest rate decision later on Wednesday.
Markets are now pricing in nearly a 92.4% chance that the US central bank will raise interest rates by 25 basis points (bps) at its September policy meeting on Wednesday, according to the CME FedWatch tool.
"A 25 basis-point increase is about 90% priced, implying the dollar will receive a modest boost if the Fed increases," said Carol Kong, currency strategist at the Commonwealth Bank of Australia in Sydney.
Fed Chair Kevin Warsh will hold a press conference following the policy meeting on Wednesday. If Warsh plays down the risk of follow-up hikes, this could weigh on the Greenback in the near term. On the other hand, hawkish remarks from Fed policymakers could lift the USD against the AUD.
On the Aussie front, the Reserve Bank of Australia (RBA) has held the Official Cash Rate (OCR) at 4.35%, following three consecutive hikes earlier this year. However, expectations are growing for further interest rate increases due to stubbornly high underlying inflation.
Markets are now pricing in nearly a 78% probability that the Australian central bank will raise the Official Cash Rate (OCR) to 4.60% at the next RBA Board meeting, according to RBA Rate Tracker.
Aussie yields jump as global bond sell-off extends
Analysts at Societe Generale note that the latest leg of the global bond sell-off has spilled over into Australia, with "Aussie 10y yields leapt 8bp to 5.41% after the melt-up in the US above 5%." They argue that "Treasuries have been stretched since yields crossed the 4.90% level last week," adding that for German debt, "for the Bund, the equivalent was 3.30%," underscoring how far core markets have moved in a short space of time.
Technical Analysis: AUD/USD retails a constructive bias in the near term
In the daily chart, AUD/USD holds above the 100-day simple moving average (SMA) and the lower Bollinger Band, suggesting a still constructive bias despite the recent pullback from earlier highs. The Relative Strength Index (RSI) at about 47 has eased back toward neutral, hinting at waning upside momentum rather than a decisive bearish shift.
On the topside, initial resistance is seen at the Bollinger middle band, the 20-day SMA, around 0.7170, with the upper band near 0.7230 forming a subsequent cap if bulls regain control. On the downside, immediate support is aligned near the current area around 0.7125, ahead of the lower band at 0.7108, while a break below there would expose the 100-day SMA at 0.7080 as the next key floor.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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