Australian Dollar holds ground against US Dollar as Fed decision looms
- AUD/USD trades in a narrow range as investors await the Federal Reserve’s interest-rate decision.
- Markets almost fully price in a 25-basis-point Fed rate hike, shifting attention to the dot plot and Kevin Warsh’s remarks.
- Hawkish Reserve Bank of Australia expectations could limit losses in the Australian Dollar.
AUD/USD trades in a narrow range on Wednesday as investors hold back from taking strong positions ahead of the Federal Reserve’s (Fed) monetary policy announcement. At the time of writing, AUD/USD trades around 0.7134, little changed on the day.
The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, holds near two-week highs around 99.67.
The Fed will announce its decision at 18:00 GMT, followed by Fed Chairman Kevin Warsh’s press conference at 18:30 GMT. Markets almost fully price in a 25-basis-point (bps) rate hike, which would lift the federal funds target range to 3.75%-4.00%. If delivered, it would be the first US rate increase since July 2023.
With the expected move already reflected in market pricing, attention will turn to the updated Summary of Economic Projections, including the dot plot, and Warsh’s post-meeting remarks.
Inflation remains the Fed’s main concern as policymakers stay committed to returning it to the 2% target. However, much of the recent upside pressure has come from elevated Oil prices caused by the war in the Middle East. Markets will therefore watch whether the Fed presents the expected hike as a one-time response to the energy-driven rise in inflation or signals that more increases are likely.
The US Dollar’s reaction could depend more on these future policy signals than on the widely expected rate hike itself. A hawkish message pointing to additional tightening could strengthen the Greenback and push AUD/USD lower. Conversely, a quarter-point increase accompanied by cautious or data-dependent guidance could weigh on the US Dollar and help the pair recover.
Even so, losses in the Australian Dollar (AUD) could remain limited as the Reserve Bank of Australia (RBA) maintains a hawkish stance. The Australian central bank kept its cash rate unchanged at 4.35% in August but warned that another increase was possible if inflation failed to ease.
As of September 15, the October 2026 ASX 30-Day Interbank Cash Rate Futures contract was trading at 95.455, implying a 78% probability that the RBA will raise the cash rate by 25 bps to 4.60% at its September 29 meeting. A rate hike would keep interest-rate differentials supportive of the Australian Dollar.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
Recommended Articles
