AUD/USD decline following US dollar surge
AUD/USD finished lower last week at 0.6592 (-0.86%) retreating from last Wednesday’s 11-month high of 0.6706.
The reversal in AUD/USD came as the United States (US) dollar surged higher after Federal Reserve (Fed) Chair Jerome Powell described last week’s rate cut as a ‘risk management cut.’ This statement left the prospects of future rate cuts dependent on data, tempering expectations of the deep rate-cutting cycle that US dollar bears had anticipated.
US dollar index recovery and technical factors
Although even a shallower rate-cutting cycle should theoretically weigh on the US dollar, the short trade on the US dollar has become crowded. After a challenging start to the year, the US dollar index (DXY), which is a broad measure of the US dollar’s strength against a basket of major currencies, has lost downside momentum in recent months.
Technical factors have also played a role. Notably, DXY rebounded to finish last week back above significant long-term trendline support at approximately 96.70 to 96.50, dating back to the May 2011 low of 72.83.
Market outlook and upcoming economic indicators
At a minimum, this suggests potential consolidation for both AUD/USD and DXY as markets await the next US non-farm payrolls report in early October, which will provide clarity on the timing and extent of Fed rate cuts into year-end.
In the interim, the near-term direction of AUD/USD will likely depend on risk sentiment, this week’s Australian monthly consumer price index (CPI) indicator previewed below, and the upcoming US inflation update on Friday night.
AU monthly CPI indicator
Date: Wednesday, 24 September at 11.30am AEST
For July, the monthly CPI indicator rose by 2.8% year-on-year (YoY), accelerating sharply from 1.9% in June. Annual trimmed mean inflation surged to 2.7% YoY from 2.1% previously, reaching its highest level since March 2025.
Some of the strength was due to timing issues, particularly regarding electricity, hotel travel, and accommodation prices. The latter was impacted by the July school holidays, which saw strong demand for domestic airfares and accommodation.
Electricity prices rose significantly after households in New South Wales (NSW) and the Australian Capital Territory (ACT) did not receive payments from the extended Commonwealth Energy Bill Relief Fund (EBRF) in July. Payment of rebates for households in NSW and ACT will instead commence in August.
This month, the preliminary expectation is for headline inflation to rise to 2.9% YoY in August, while the trimmed mean is expected to ease fractionally to 2.6% YoY.
The Australian interest rate market starts the week pricing in 4 basis points (bp) of Reserve Bank of Australia (RBA) rate cuts for September and a total of 17 bp of rate cuts for RBA’s meeting in November.