Australian Dollar refreshes weekly low as reduced RBA rate hike bets counter softer USD

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The AUD/USD pair attracts fresh selling following an intraday uptick to the 0.7180 supply zone on Wednesday and continues losing ground through the first half of the European session.

AUD/USD comes under heavy selling pressure in reaction to softer Australian inflation figures.
This, along with the dismal Aussie jobs report, tempers RBA rate hike bets and weighs on the AUD.
Geopolitical risks and hawkish Fed bets favor the USD bulls, backing the case for further losses.

The AUD/USD pair attracts fresh selling following an intraday uptick to the 0.7180 supply zone on Wednesday and continues losing ground through the first half of the European session. The downward trajectory drags spot prices to a fresh weekly low, around the 0.7135 region in the last hour, and seems rather unaffected by a mildly softer US Dollar (USD).

Investors remain hopeful about tentative progress in US-Iran diplomatic talks, easing fears of severe energy supply disruptions and leading to a modest downtick in Crude Oil prices. The resultant fall in US Treasury bond yields undermine the USD, though the AUD/USD pair struggles to lure buyers amid reduced bets for further interest rate hikes by the Reserve Bank of Australia (RBA).

The Australian Bureau of Statistics (ABS) reported that the headline Consumer Price Index (CPI) slowed from the 4.6% YoY rate in March to 4.2% in April. Moreover, an unexpected rise in Australian Unemployment Rate to 4.5% in April and a fall in the number of employed people dampen hawkish RBA expectations. In fact, traders are now pricing in only around a 10% chance of a June rate hike.

Moreover, market expectations are largely shifting toward a potential rate hold or a single 25-basis-point (bps) hike later in the year, which, in turn, weighs heavily on the Australian Dollar (AUD). Meanwhile, the US and Iran remain at odds over Tehran's nuclear program and the Strait of Hormuz. Furthermore, renewed US attacks on Iran tempered hopes for a deal to end a three-month-old war.

This keeps geopolitical risk premium in play, which, along with bets for at least one 25 bps rate hike by the US Federal Reserve (Fed) in 2026, favors the USD bulls and suggests that the path of least resistance for the AUD/USD pair is to the downside. Hence, some follow-through downfall towards retesting the monthly swing low, levels below the 0.7100 mark, looks like a distinct possibility.

RBA FAQs

What is the Reserve Bank of Australia and how does it influence the Australian Dollar?

The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.

How does inflation data impact the value of the Australian Dollar?

While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.

How does economic data influence the value of the Australian Dollar?

Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.

What is Quantitative Easing (QE) and how does it affect the Australian Dollar?

Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.

What is Quantitative tightening (QT) and how does it affect the Australian Dollar?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.