AUD/USD slides as US Dollar gains on geopolitical tensions ahead of Fed decision

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The Australian Dollar (AUD) edges lower against the US Dollar (USD) on Wednesday, weighed by softer-than-expected Australian inflation data, while fading hopes that the US-Iran war will end anytime soon support the Greenback.

AUD/USD weakens as softer Australian CPI and a firm US Dollar pressure the Aussie.
US-Iran tensions remain elevated as peace talks stall and supply disruptions in the Strait of Hormuz persist.
Markets await the Federal Reserve’s monetary policy announcement.

At the time of writing, AUD/USD is trading around 0.7139, down nearly 0.60% on the day. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 98.78, up about 0.15%.

Market sentiment weakens after Reuters reported that US President Donald Trump and oil companies discussed plans to maintain the Iran blockade for months if needed, citing a White House official. Trump also warned that “Iran can’t get their act together. They don’t know how to sign a nonnuclear deal. They better get smart soon,” he wrote on Truth Social. The comments follow US skepticism over Iran’s proposal to end the war and reopen the Strait of Hormuz while delaying nuclear talks.

Looking ahead, attention turns to the Federal Reserve’s (Fed) monetary policy decision due at 18:00 GMT. Markets widely expect the central bank to keep interest rates unchanged in the 3.50%-3.75% range as policymakers assess the impact of rising energy prices on inflation, driven by ongoing supply disruptions in the Strait of Hormuz.

Inflation continues to run above the Fed’s 2% target, with rising Oil prices increasing upside risks. This has dampened expectations for near-term rate cuts, reinforcing a higher-for-longer policy outlook. Markets will therefore focus on guidance from Fed Chair Jerome Powell.

A hawkish tone could further support the US Dollar, while any signal that the Fed remains open to rate cuts later this year may limit the Greenback’s upside. However, downside in the US Dollar is likely to remain limited amid persistent geopolitical uncertainty.

Although the Reserve Bank of Australia’s (RBA) hawkish outlook continues to provide underlying support for the Aussie, the latest inflation data showed Consumer Price Index (CPI) rising to 4.6% in March from 3.7% in February, but still below expectations of 4.7%.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.