Australian Dollar rebounds as weak US ISM PMI weighs on the US Dollar

The Australian Dollar (AUD) edges modestly higher against the US Dollar (USD) on Tuesday, paring early losses as the Greenback comes under renewed pressure amid fresh signs of a slowing US economy.

The AUD/USD pair drifted lower for most of Tuesday’s session but rebounded from an intraday low of 0.6449, climbing toward 0.6473 during American trading hours after the US ISM Services Purchasing Managers Index (PMI) disappointed market expectations.

The ISM Services PMI for July fell to 50.1, missing expectations of 51.5 and slipping from 50.8 in June, signaling a further loss of momentum in the U.S. services sector. While the headline reading still indicates marginal expansion, the details were more concerning. The Employment Index dropped deeper into contraction territory at 46.4, down from 47.2, highlighting ongoing labor market weakness. New Orders also declined to 50.3 from 51.3, pointing to fading demand.

More worryingly for the inflation outlook, the Prices Paid Index jumped to 69.9, up from 67.1, pointing to elevated cost pressures despite softening activity. The mixed signals further cloud the Federal Reserve’s policy outlook, with markets increasingly leaning toward a rate cut in September. According to CME FedWatch, rate cut odds have climbed to 90%, contributing to the renewed weakness in the US Dollar and offering support to risk-sensitive currencies like the Aussie.

Earlier on Tuesday, the Australian Dollar found modest support from stronger-than-expected domestic PMI data. The S&P Global Services PMI for July climbed to 54.1, beating forecasts and the prior reading of 53.8, highlighting continued resilience in the services sector. Meanwhile, the Composite PMI edged up to 53.8 from 53.6, signaling steady expansion across both manufacturing and services.

That said, investor sentiment remains cautious ahead of the Reserve Bank of Australia’s (RBA) monetary policy decision on August 12, with markets widely anticipating a 25 basis point rate cut to 3.60%. The dovish shift comes amid a notable slowdown in core inflation — the RBA’s preferred gauge, which eased to 2.7% in June, comfortably within the central bank’s 2-3% target range. Markets have now priced in a nearly 95% probability of a rate cut this month and are expecting two additional reductions by early 2026.

Meanwhile, the US Dollar Index (DXY) retreated from an intraday high of 99.07 to trade near 98.77 during the American session, as traders reacted to the weaker ISM data and increased bets on policy easing by the Federal Reserve(Fed).