Australian Dollar edges higher to near 0.7000 on weak US Sentiment
- AUD/USD gains ground to near 0.6985 in Monday’s early Asian session.
- Consumer Sentiment Index dropped to 46.3 in October, vs 48.1 prior.
- The odds of the RBA lifting interest rates in November have fallen sharply after the latest CPI data.
The AUD/USD pair trades with mild gains around 0.6985 during the early Asian session on Monday. Softening US Consumer Sentiment weigh on the US Dollar (USD) against the Australian Dollar (AUD). Traders will keep an eye on the Minutes of the Reserve Bank of Australia meetings, which are due on Tuesday.
The University of Michigan's Consumer Sentiment Index fell to 46.3 in October from 48.1 in September. This figure came in weaker than the market expectations of 47.6. Nonetheless, UoM inflation expectations rose, cementing expectations for a 25 basis points (bps) Fed rate hike at its upcoming meeting.
Markets are pricing in only a 17.7% chance for a Fed rate hike of at least 25 basis points this month, down slightly from 24.4% a week ago, according to CME Fedwatch. Investors are pricing in an 84.1% odds for a hike at the central bank's December meeting.
On the Aussie front, traders reduced their bets on a Reserve Bank of Australia (RBA) rate increase in the November policy meeting after the latest Consumer Price Index (CPI) came in line with expectations. Former RBA board member Ian Harper said that a further interest rate hike this year is "plausible", but not necessarily likely.
Money markets are now betting the Australian central bank will likely keep rates on hold at its next meeting in early November. The odds of a rate hike dropped to around 20%, according to market data from LSEG.
Lower US Treasury volatility offers support to risk-sensitive currencies
Strategists at OCBC highlight that “solid 10yr and 30yr Treasury auctions over consecutive days show there is a level where buyers step in,” helping to steady the rates backdrop after recent turbulence. They note that “Treasury volatility, tracked by the MOVE index, was at the epicentre of the recent global rate volatility before it was overtaken by French government bond volatility,” underscoring how the focus has shifted away from US duration. Looking ahead, OCBC argues that “the recent turn lower in the MOVE index, if sustained, should prevent the wobbling of risk-sensitive currencies like AUD and EM carry trades from turning into a deeper sell-off,” suggesting a more supportive environment for high-beta FX and carry positions.
Fed’s Musalem flags need for further tightening as inflation stays elevated
Fed’s Musalem delivered a clearly hawkish message, with a FXS Speechtracker score of 7.3/10, marginally above the 7.2/10 historical average and signaling a tone slightly firmer than the established baseline. The emphasis that “more monetary policy firming will be required” to bring inflation back to 2% in a timely manner, alongside comments that the economy is “pretty strong” and the job market “balanced and stable,” underscores a bias toward additional rate hikes even as Musalem claims to go into meetings with an open mind. Musalem’s focus on persistent demand pressures, supply shocks, and structurally higher real yields driven by strong capital demand and AI investment points to a view that policy rates may need to stay higher for longer to keep inflation expectations anchored and protect the Dollar’s yield advantage.
The FXS Fed Sentiment Index slipped by 0.25 points to 138.33, indicating a modest pullback in perceived hawkishness despite the speech remaining firmly in tightening territory. With the index well above the neutral 100 mark, the Fed is still seen as hawkish overall, and Musalem’s remarks about considering rate increases and structurally higher rates reinforce that stance even as the incremental shift in the index suggests some moderation at the margin.
Technical Analysis: AUD/USD keeps a bearish vibe below the 100-day SMA
In the daily chart, AUD/USD holds a bearish near-term bias as price sits beneath the 100-day simple moving average (SMA) and the Bollinger Bands’ 20-day middle SMA, keeping the broader tone capped after the recent slide from the 0.72 area. The Relative Strength Index (14) at 40.9 remains below the midline, hinting at lingering downside pressure rather than oversold conditions, while the lower Bollinger band near 0.6889 marks the next volatility floor below the market.
On the topside, initial resistance emerges at the Bollinger middle band around 0.7020, followed by the 100-day SMA at 0.7045, a zone that would need to be reclaimed to ease the current bearish tone, with a more distant hurdle at the upper Bollinger band near 0.7155. On the downside, the only nearby structural support is seen at the lower Bollinger band at 0.6890, where a break would open the door to a deeper decline, while holding above this band would suggest consolidation within the current downtrend.
(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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