Australian Dollar loses ground with RBA decision, US midterm elections in focus

• AUD/USD falls ahead of the RBA interest rate decision due on Tuesday.
• The RBA is widely expected to raise rates as inflation remains above target.
• A softer US Dollar offers limited support as traders await US elections and key economic data.

AUD/USD trades on the back foot on Monday as the Australian Dollar (AUD) underperforms all its major peers. Traders are likely trimming exposure before the Reserve Bank of Australia’s (RBA) monetary policy announcement on Tuesday, weighing on the Aussie despite a softer US Dollar (USD). At the time of writing, the pair trades around 0.7010, near one-week lows and down 0.33% on the day.

The RBA is widely expected to raise interest rates by 25 basis points (bps), marking its fifth increase this year and taking the cash rate to 4.85%, its highest since 2008. Inflation remains above the central bank’s 2%-3% target range, with headline CPI accelerating to 4.3% YoY in September from 4.0% in August. Annual trimmed mean inflation also rose to 3.6% from a revised 3.5%.

Rabobank’s FX strategists note that, "there is risk of subsequent rate hikes, depending on the trajectory of the oil price after the US mid-term elections,” the recent “lacklustre tone of the AUD” underscores market unease that Governor Bullock may signal rising concern over “the health of the real economy.” In their view, “simply put, expectations for further RBA policy tightening are likely to strengthen if Bullock focuses her commentary tomorrow on inflation risks and are likely to fall if, like the RBNZ, she instead focuses on economic headwinds.”

Meanwhile, China’s RatingDog Manufacturing Purchasing Managers’ Index (PMI) eased to 52.0 in October from 52.1, but beat expectations of 51.6. Factory output grew at its fastest pace in six months, although export-order growth slowed and business confidence fell to a nine-month low, presenting a mixed picture of conditions in Australia’s key trading partner.

Oil prices fell more than 4% on Monday as traders responded to encouraging diplomatic headlines from the Middle East. Iranian President Masoud Pezeshkian said the Supreme Leader had granted the government certain powers regarding negotiations, according to ISNA. Earlier, Axios reported that US President Donald Trump favoured giving diplomacy with Iran more time.

The US Dollar remains under pressure despite a hawkish Federal Reserve (Fed) outlook as traders turn cautious before Tuesday’s US midterm elections. Lower Treasury yields also weigh on the Greenback, with the recent AI-led technology sell-off driving demand for government bonds. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades around 101.65, near one-week lows.

Traders now look to US economic data for clues on the Fed's next move after it held rates at 3.75%-4.00% last week. The ISM Manufacturing PMI is due later on Monday, followed by JOLTS Job Openings on Tuesday. Wednesday brings ADP Employment Change and the ISM Services PMI, while Friday’s Nonfarm Payrolls (NFP) report rounds out the week.