Inflation impacts and US dollar strength
AUD/USD finished lower last week at 0.6547 (-0.70%), marking a second consecutive week of declines and about a 2.4% pullback from the 0.6706 high struck in mid-September.
The pair’s decline occurred despite Australia’s higher-than-expected monthly inflation reading last week, which has led markets to temper expectations of multiple Reserve Bank of Australia (RBA) interest rate cuts in this easing cycle. The Australian dollar came under pressure as the United States (US) dollar extended its broad-based gains that began earlier this month, in the wake of the Federal Open Market Committee’s (FOMC) 25 basis point (bp) rate cut.
The Federal Reserve (Fed) Chair sounded less dovish than expected, boosting the greenback. Gains accelerated last week due to stronger-than-expected US economic data, short covering, and month and quarter-end rebalancing flows.
Factors influencing AUD/USD’s next moves
AUD/USD’s next moves will likely depend on risk sentiment, remaining month and quarter-end rebalancing flows, the tone of Tuesday’s RBA Board meeting, and Friday’s monthly US labour force report. If the RBA’s tone on Tuesday is more hawkish and is followed by another weak US non-farm payrolls report that pushes the US unemployment rate higher, AUD/USD should find firmer footing after its recent pullback.
RBA interest rate meeting
Date: Tuesday, 30 September at 2.30pm AEST
At its last meeting in August, the RBA lowered its official cash rate by 25 bp to 3.60%. The outcome was widely expected by the market and the Board’s decision to cut rates was unanimous.
The RBA noted progress in reducing inflation, with updated staff forecasts suggesting that ‘underlying inflation will continue to moderate to around the midpoint of the 2-3% range, with the cash rate assumed to follow a gradual easing path.’
Since then, two higher-than-expected monthly consumer price index (CPI) reports have reinforced expectations that the RBA will keep its cash rate on hold at 3.60% at its meeting tomorrow.
This aligns with the RBA’s cautious easing approach this year, where a rate cut is followed by a pause at the next meeting. The real focus will be on the tone of the statement and the press conference.
The tone is expected to be cautious with an emphasis on data dependence. However, there is some risk it will sound more hawkish if the RBA highlights upside risks to its inflation forecasts.
The Australian interest rate market starts the week pricing in 2 bp of rate cuts for tomorrow’s meeting and a total of 13 bp, or a 50% probability of a 25 bp rate cut in November.