Australian Dollar trades flat as traders await clearer signals on Fed policy outlook

• Australian Dollar moves little as the US Dollar gained ground despite rising likelihood of Fed rate cuts.

• Australia’s stronger July inflation reduced the chances of an imminent Reserve Bank of Australia rate cut.

• The CME FedWatch tool indicates more than 89% of a 25-basis-point Fed rate cut in September.

The Australian Dollar (AUD) steadies against the US Dollar (USD) following its five-day winning streak. Rising odds of a US Federal Reserve (Fed) rate cut in the September meeting weighed on the US Dollar (USD), which supported the AUD/USD pair. The United States (US) August ISM Manufacturing Purchasing Managers Index (PMI) will be eyed later in the day.

Traders are now pricing in more than 89% of a 25 basis points (bps) rate cut by the Fed at the September policy meeting, up from an 84% chance a week ago, according to the CME FedWatch tool. Market participants are also awaiting labor market data this week that could shape the US Federal Reserve’s (Fed) policy decision in September. Key reports include ADP Employment Change, Average Hourly Earnings, and Nonfarm Payrolls for August.

Australia’s Monthly Consumer Price Index rose 2.8% year-over-year in July, beating both the previous 1.9% increase and the 2.3% forecast. The hotter inflation in July dampened the likelihood of a Reserve Bank of Australia (RBA) rate cut anytime soon, continuing to provide support for the Australian Dollar.

Australian Dollar holds steady as US Dollar stages an upward correction

Australia’s Building Permits declined 8.2% month-over-month in July, surpassing the expected decline of 4.8%. The previous reading indicated an increase of 11.9%. Meanwhile, the annual data showed an increase of 6.6%, following a previous 27.4% rise, as data showed on Monday.

Australia’s Private Sector Credit rose 0.7% month-on-month in July, following two straight 0.6% increases and marking the fastest growth since April. On an annual basis, private credit expanded 7.2%, up from 6.9% in the previous two months, the strongest pace since February 2023. Private Capital Expenditure rose 0.2% in the second quarter, from the previous decline of 0.1% but fell short of the expected 0.7% increase.

China’s Caixin Manufacturing Purchasing Managers’ Index (PMI) jumped to 50.5 in August from 49.5 in July, according to the latest data released on Monday. It is worth noting that any change in the Chinese economy could influence AUD as China and Australia are close trading partners.

China’s National Bureau of Statistics (NBS) reported on Sunday that the country’s Manufacturing PMI rose to 49.4 in August from 49.3 in July. The reading came in weaker than the expectation of 49.5 and marked five consecutive months of decline. However, the NBS Non-Manufacturing PMI climbed to 50.3 in August, versus 50.1 prior and in line with the market consensus.

The US Dollar Index (DXY), which measures the value of the US Dollar against six major currencies, is gaining ground after five days of losses and trading around 97.70 at the time of writing. Investors also assessed Friday’s Personal Consumption Expenditures (PCE) Price Index, which signaled persistent inflationary pressures and heightened uncertainty over potential rate cuts.

US Personal Consumption Expenditures (PCE) Price Index held steady at 2.6% year-over-year in July, coming in line with the market expectation. The US core PCE Price Index, which excludes volatile food and energy prices, rose 2.9% YoY in July, as expected, following June's increase of 2.8%. On a monthly basis, the core PCE Price Index rose 0.2% and 0.3%, respectively.

San Francisco Fed President Mary Daly said on Sunday that policymakers will be ready to cut interest rates soon, adding that inflation stemming from tariffs will likely prove temporary, per Bloomberg.

The US Court of Appeals for the Federal Circuit upheld a ruling that the sweeping tariffs the US President Donald Trump unilaterally imposed on most other countries were illegal, CNN reported on Friday. Trump blasted the decision as “highly partisan” and vowed to appeal to the US Supreme Court.

Fed Governor Christopher Waller said on Thursday that he would support an interest-rate cut in the September meeting and further reductions over the next three to six months to prevent the labor market from collapsing, per Reuters.

President Trump announced last week that he was removing Fed Governor Lisa Cook from her position on the Fed's board of directors. The dismissal of Fed Governor Cook could increase the likelihood of heavy interest rate cuts, given Trump’s ongoing pressure on the central bank to reduce borrowing costs.

Fed Chair Jerome Powell said at the Jackson Hole symposium that risks to the job market were rising, but also noted inflation remained a threat and that a decision wasn't set in stone. Powell also stated that the Fed still believes it may not need to tighten policy solely based on uncertain estimates that employment may be beyond its maximum sustainable level.

Australian Dollar tests 0.6550 barrier near five-week highs

The AUD/USD pair is trading around 0.6550 on Tuesday. The technical analysis of the daily chart suggests that the pair is trading above the ascending trendline, strengthening the bullish bias. Additionally, the pair is positioned above the nine-day Exponential Moving Average (EMA), indicating short-term price momentum is stronger.

The AUD/JPY pair could test its initial barrier at the five-week high of 0.6568, reached on August 14, followed by the nine-month high of 0.6625, which was recorded on July 24.

On the downside, the primary support appears at the ascending trendline, aligned with the nine-day EMA of 0.6520 and followed by the 50-day EMA at 0.6502. A break below this crucial support zone would signal the emergence of a bearish bias and prompt the pair to test its three-month low of 0.6414, recorded on August 21.

AUD/USD: Daily Chart