Australian Dollar loses further ground against US Dollar as US bond yields surge

• Australian Dollar extends losses as higher US bond yields weigh on demand for riskier currencies.
• Interest rate rises at the Fed’s December, January and March policy meetings are now expected by TD Securities.
• The RBA appears to have reached the end of its monetary tightening cycle.

A 0.15% decline leaves the Australian Dollar (AUD) trading at around 0.6795 against the US Dollar (USD) during Friday’s European session, extending its run of losses. Behind the Aussie pair’s underperformance is a surge in United States (US) Treasury yields, which has eroded the appeal of riskier assets, including the Australian Dollar.

After climbing almost 5.5% over the past two trading days, 10-year US Treasury yields remain near a three-week high of $5.13% at the time of writing.

US inflation drives Treasury yields higher

The latest US inflation figures were the principal catalyst for the rise in US Treasury yields, according to strategists at Deutsche Bank. They point out that “the monthly core CPI print for October was above consensus at +0.30% (vs. +0.2% expected).” The strategists also emphasise that “it was the third consecutive month with core CPI at +0.3%, and if you take those three months together, the annualised pace for core CPI is running at +3.75%.” In Deutsche Bank’s assessment, “that’s the fastest pace on that measure since April 2024, so it made it increasingly difficult to dismiss this as a blip.”

Faced with the risk that US inflation will remain elevated, market experts have had to reconsider their expectations for interest rate increases by the Federal Reserve (Fed).

A more hawkish near-term policy outlook has been adopted by TD Securities, according to the firm’s strategists. They now anticipate "25bp hikes in December, January, and March," having previously forecast increases only in December and March.

Expectations in financial markets that the Reserve Bank of Australia’s (RBA) interest rate cycle has ended are also contributing to the Australian Dollar’s underperformance.

AUD loses support as scope for further RBA tightening narrows

With investors concluding that the RBA is “running out of scope for additional rate hikes at a time when investors are reappraising their views on additional Fed rate hikes,” MUFG analysts judge that “time appears to have run out for providing support for the currency”. This contrasts with their observation that the earlier “pre-emptive nature of monetary tightening in Australia has benefitted the Australian Dollar,” and reflects how front-loaded the current cycle has been. The analysts note that the RBA has already “hiked on five occasions this year and the policy rate at 4.85% is the highest since 2008 when the RBA was cutting rates into the Global Financial Crisis,” highlighting the extent of tightening already delivered. As a consequence of that pre-emptive approach, “the OIS curve through to Q4 2027 shows mostly a flat curve but a probability of a rate cut (-15bps priced) in Q3-Q4 next year,” supporting the assessment that Australian interest rates have largely exhausted their capacity to bolster the Aussie, just as US rate expectations are being revised upwards.

Attention now turns to Tuesday’s publication of the minutes from the RBA’s October policy meeting.

AUD/USD Remains Under Pressure Below Its 20-Day EMA

At 0.6795 on the daily chart, AUD/USD continues to retreat beneath its 20-day exponential moving average (EMA) of 0.6930. That average now provides the nearest overhead resistance, maintaining a bearish near-term outlook. An inability to regain the EMA suggests that rallies are likely to attract selling. Meanwhile, the Relative Strength Index (14), at 31.8, sits just above oversold territory, signalling continued downward pressure and only a modest risk of a corrective rebound.

For the bearish tone to ease and a more sustained recovery to become possible, a daily close above initial resistance at the 20-day EMA, around 0.6930, would be required. Below the market, the current dataset offers no clear technical support levels. Traders may therefore consider earlier price lows and psychological levels beneath 0.6800 as possible demand zones. Even so, the prevailing structure leaves such support vulnerable for as long as the price remains below the EMA.

(The technical analysis of this story was written with the help of an AI tool. Know more.)