Australian Dollar weakens as attention turns to RBA decision and US midterm elections

• AUD/USD retreats before Tuesday’s RBA interest rate decision.
• Above-target inflation underpins widespread expectations of an RBA rate rise.
• US elections and major economic releases keep traders waiting, with a weaker US Dollar providing only modest support.

At around 0.7010 at the time of writing, AUD/USD is down 0.33% on Monday and close to one-week lows, with the Australian Dollar (AUD) lagging all its major counterparts. The pressure on the Aussie, despite a weaker US Dollar (USD), likely reflects traders reducing exposure ahead of Tuesday’s monetary policy announcement from the Reserve Bank of Australia (RBA).

September’s headline CPI rose to 4.3% YoY from 4.0% in August, leaving inflation above the central bank’s 2%-3% target range. Annual trimmed mean inflation increased as well, reaching 3.6% from a revised 3.5%. Against that backdrop, the RBA is widely expected to deliver a 25 basis point (bps) interest rate rise, its fifth this year, lifting the cash rate to 4.85%, the highest since 2008.

According to Rabobank’s FX strategists, “there is risk of subsequent rate hikes, depending on the trajectory of the oil price after the US mid-term elections,” while the recent “lacklustre tone of the AUD” highlights market anxiety that Governor Bullock could voice greater concern about “the health of the real economy.” Their assessment is that “simply put, expectations for further RBA policy tightening are likely to strengthen if Bullock focuses her commentary tomorrow on inflation risks and are likely to fall if, like the RBNZ, she instead focuses on economic headwinds.”

In China, the RatingDog Manufacturing Purchasing Managers’ Index (PMI) slipped from 52.1 to 52.0 in October, still exceeding the 51.6 forecast. Conditions in Australia’s key trading partner were mixed: factory output expanded at its quickest pace in six months, but growth in export orders moderated and business confidence dropped to a nine-month low.

Following an Axios report that US President Donald Trump favours allowing more time for diplomacy with Iran, oil prices dropped more than 4% on Monday. According to ISNA, Iranian President Masoud Pezeshkian also said that the Supreme Leader had given the government certain powers over negotiations. These developments come after last week’s Wall Street Journal report that Washington had told Gulf states to prepare for possible military action against Iran following the US midterm elections.

Despite a hawkish outlook for the Federal Reserve (Fed), caution ahead of Tuesday’s US midterm elections continues to weigh on the US Dollar. The recent AI-led sell-off in technology shares has boosted demand for government bonds, with lower Treasury yields adding to the pressure on the Greenback. Trading around 101.65 and close to one-week lows, the US Dollar Index (DXY) measures the Greenback against a basket of six major currencies.

After the Fed left rates unchanged at 3.75%-4.00% last week, attention turns to US economic releases for indications of its next policy move. Later on Monday, the ISM Manufacturing PMI is due, ahead of Tuesday’s JOLTS Job Openings. ADP Employment Change and the ISM Services PMI follow on Wednesday, before Friday’s Nonfarm Payrolls (NFP) report closes the week.