Australian Dollar holds steady below multi-month top vs USD; RBA decision awaited

The Australian Dollar (AUD) consolidates against its American counterpart during the Asian session on Tuesday and, for now, seems to have stalled the previous day's modest pullback from its highest level since September 18. The uptick, however, lacks follow-through as bullish traders seem reluctant and opt to wait for the Reserve Bank of Australia's (RBA) final rates decision of 2025 before placing fresh bets. The central bank is widely expected to keep rates on hold amid inflationary concerns. Hence, the focus will remain glued to the accompanying policy statement and the post-meeting press conference. Investors will look for cues about the RBA's next policy move amid bets for interest rate hikes next year, which, in turn, will drive the AUD.

Heading into the key central bank event risk, the cautious market mood could act as a headwind for the risk-sensitive Aussie and cap the AUD/USD pair amid a modest US Dollar (USD) uptick. Any meaningful USD appreciation, however, seems elusive in the wake of the growing acceptance that the US Federal Reserve (Fed) will lower borrowing costs again on Wednesday. This marks a significant divergence in comparison to hawkish RBA expectations, which has been a key factor behind the AUD's relative outperformance over the past two weeks or so and favors bullish traders. Moreover, the underlying bullish sentiment suggests that the path of least resistance for the risk-sensitive is to the upside and backs the case for additional gains.

Australian Dollar bulls have the upper hand ahead of the crucial RBA rate decision

• There's been a notable repricing in the markets over the past two weeks that the Reserve Bank of Australia is done cutting rates for now, as price pressures are proving to be persistent. In fact, inflation remains above the RBA’s 2% to 3% annual target and raises questions about just how much headroom the central bank has to ease policy.
• Moreover, RBA Governor Michele Bullock said last week that if inflation proves to be persistent, it would have implications for future monetary policy. Investors now seem convinced that the RBA to leave the Official Cash Rate (OCR) unadjusted at 3.6%, following the conclusion of its December monetary policy meeting this Tuesday.
• Some analysts even believe that the RBA might be done with easing and could even consider tightening heading into 2026 if domestic conditions stay firm and inflation doesn't cool. Hence, market participants will closely scrutinize the accompanying RBA policy statement for the forward guidance about potential interest rate hikes.
• However, there is a chance that the RBA strikes a less hawkish tone after last week’s lacklustre GDP report, which showed that the economic growth slowed to 0.4% during the July-September period, from 0.6% in the second quarter. This could undermine the Australian Dollar, though the downside for the AUD/USD pair seems limited.
• The US Commerce Department reported last Friday that the Personal Consumption Expenditures Price Index rose 2.8% on a yearly basis in September, matching estimates. The core gauge rose 2.8% compared to 2.9% in August, which, along with signs of a cooling US labor market, reaffirmed dovish Federal Reserve expectations.
• According to the CME Group's FedWatch Tool, traders are pricing in a nearly 90% chance that the US central bank will lower borrowing costs by 25 basis points at the end of a two-day policy meeting on Wednesday. This should cap a modest US Dollar recovery from its lowest level since late October and support the AUD/USD pair.
• Apart from the key central bank event risks, traders will take cues from a duo of US labor market reports on Tuesday – the ADP Weekly Employment Change and JOLTS Job Openings. The focus will then shift to the FOMC decision on Wednesday and the Australian monthly employment details, due for release on Thursday.

AUD/USD constructive technical setup backs the case for a further near-term appreciation

The AUD/USD pair finds some support near the 0.6615-0.6620 resistance breakpoint. Moreover, oscillators on the daily chart are holding comfortably in positive territory and are still away from being in the overbought zone, validating the near-term constructive outlook for the currency pair. Some follow-through buying beyond the 0.6645-0.6650 region, or a multi-month top touched on Monday, will set the stage for a move towards challenging the year-to-date peak, levels just above the 0.6700 mark, touched in September.

On the flip side, weakness below the 0.6600 round figure could be seen as a buying opportunity near the 0.6560-0.6555 region. This is followed by the 100-day Simple Moving Average (SMA), around the 0.6540-0.6535 area, below which the AUD/USD pair could weaken to the 0.6500 psychological mark en route to the 0.6480 horizontal zone. Failure to defend the said support levels would negate the positive outlook and shift the near-term bias in favor of bearish traders, exposing a multi-month low, around the 0.6420 region, touched in November.