Australian Dollar edges higher as softer US Dollar, hawkish RBA offer support

AUD/USD edges higher on Tuesday as a pullback in US Treasury yields weighs on the US Dollar (USD), pulling it away from recent highs. Meanwhile, hawkish signals from the Reserve Bank of Australia (RBA) provide underlying support to the Australian Dollar (AUD). At the time of writing, the pair trades around 0.6982, up 0.33% on the day.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 102.25 after reaching 102.61 on Monday, its highest since April 2025. Meanwhile, the benchmark 10-year US Treasury yield slips below 5.20%, retreating from last week’s peak of 5.36%, its highest since 2002.

Yields ease as Oil prices decline modestly, while a sell-off in AI-related stocks encourages demand for government bonds. Short covering following the recent bond sell-off also contributes to the retreat in yields.

However, Oil prices remain elevated as the US-Iran stalemate keeps Middle East supply risks in focus. Higher energy costs add to global inflation pressures, reinforcing expectations of tighter monetary policy. Traders widely expect another Federal Reserve (Fed) interest rate hike before year-end, which could limit further declines in the US Dollar and Treasury yields.

Attention now turns to the US Consumer Price Index (CPI) report, due on Wednesday, which could reshape expectations for the Fed’s October 27-28 meeting. According to the CME FedWatch Tool, markets expect the central bank to leave interest rates unchanged this month, while pricing in an approximately 85% probability of a rate hike in December.

RBA focus on inflation sharpens as weaker Aussie and global rates loom large

On the Australian side, the RBA’s September meeting minutes, released on Tuesday, confirmed a unanimous decision to raise the cash rate by 25 basis points to 4.60%. Policymakers highlighted the need to act promptly to keep inflation expectations anchored.

Analysts at Commerzbank note that the minutes released early this morning “make clear just how strongly the RBA’s focus has shifted towards inflation,” with the central bank increasingly preoccupied by mounting price pressures. According to the bank, the RBA is worried about inflation “for several reasons,” starting with “global developments over which it has no control but to which it nevertheless has to respond.”

From a currency standpoint, Commerzbank highlights that “another argument was particularly interesting from an FX perspective,” as the RBA “expressed concern that a weaker AUD could contribute to elevated price pressures through imported inflation.” In the same context, the minutes pointed out that “a rise in the global neutral interest rate could cause the AUD to depreciate if Australia’s neutral rate had not increased by a similar amount,” although Commerzbank notes that “the RBA appeared to assume that it had.”

Looking ahead, Commerzbank argues that “three factors are therefore likely to be crucial for the RBA,” with the first being “what other central banks do.” The bank cautions that “if they raise rates more aggressively than expected, the RBA could feel compelled to tighten further as well to prevent an excessive depreciation of the AUD.”