Australian Dollar slips as US Dollar strengthens amid uncertainty over Fed outlook
- AUD/USD weakens as markets remain divided on a September Fed rate hike ahead of critical inflation data releases.
- Despite rising oil prices, odds for a September Fed rate hike fell from 52% to nearly 48%.
- MUFG and Westpac warn energy risks could trigger RBA hikes, while NAB expects rates held until mid-2027 cuts.
AUD/USD depreciates after registering modest gains in the previous day, trading around 0.7060 during the Asian hours on Wednesday. The currency pair loses ground as the US Dollar (USD) rises ahead of a crucial inflation report. Traders are closely watching this upcoming reading, as it is expected to play a major role in shaping the Federal Reserve’s (Fed) next interest rate decision.
Market expectations remain divided over the central bank's rate trajectory following its decision to hold rates steady in July. Although rising crude oil prices have fueled arguments for a more aggressive policy stance, odds for a 25-basis-point Fed rate hike in September have softened slightly, dropping to nearly 48% according to the CME FedWatch Tool, down from 52% the previous day.
The Greenback receives support from geopolitical uncertainty surrounding a potential diplomatic deal between the US and Iran. Market sentiment briefly improved after Pakistan’s defence minister indicated that Washington and Tehran were approaching an agreement regarding the Strait of Hormuz, alongside reports that parallel negotiations between Iran and Oman had reached an advanced stage. However, US President Donald Trump insisted that Tehran must pay reparations to the victims of attacks associated with the Islamic Republic, injecting renewed caution into the markets.
The Reserve Bank of Australia unanimously held the cash rate at 4.35% in August, but major forecasters split on the outlook. MUFG warns that surging energy prices driven by US-Iran tensions and the closure of the Strait of Hormuz threaten a global inflation shock, potentially forcing an RBA hike as early as September. Westpac calls it a "hawkish hold," arguing softer domestic data weakened the explicit tightening bias, though rising energy risks leave a late-year hike on the table. Conversely, NAB views conditions as sufficiently restrictive, forecasting steady growth and a hold through 2026 before mid-2027 cuts.
RBA tightening weighs as Australia data momentum cools
BNY’s Wee Khoon Chong highlights that the domestic backdrop has turned more challenging, with “financial conditions have tightened, consumer spending is slowing gradually, housing momentum has softened, and labor market conditions have eased a little more than expected.” Against that softer tone in activity, Chong notes the RBA still characterizes policy as somewhat restrictive and expects inflation to return to the midpoint of its target only by late 2027, reinforcing a cautious outlook for the Aussie and AUD/USD.
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.
Author
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
