Fed tightening bets push Australian Dollar down to 10-month low

• At its weakest since January, the Australian Dollar faces pressure from risk aversion and US Dollar strength.
• Further interest rate rises remain in focus as firmer US inflation and hawkish Fed comments bolster expectations of more tightening.
• Following last week’s interest rate rise to 4.85%, the RBA indicates that a pause in tightening may follow.

Trading around 0.6808 at the time of writing, AUD/USD is down 0.60% on the day as Thursday’s losses take it to its weakest since January. Demand for the safety of the US Dollar (USD) is weighing on the pair, while expectations of a hawkish Federal Reserve (Fed) provide additional support for the Greenback.

Reports of Nvidia CEO Jensen Huang’s resignation weighed on US technology shares, allowing the US Dollar to regain ground after a modest decline earlier in the session. Caution also increased among investors after US President Donald Trump stated on Truth Social that the US does not need a deal with Iran.

A new year-to-date high of 103.19 is reached by the US Dollar Index (DXY), which measures the Greenback against a basket of six major currencies.

A December Fed rate rise is fully priced in by traders. A 25-basis-point (bps) increase is seen as the most likely outcome, although markets assign a small probability to a larger 50 bps rise. With more Fed officials advocating higher rates to curb inflation, markets anticipate additional tightening into 2027.

To bring inflation down, monetary policy must become restrictive, Cleveland Fed President Beth Hammack said on Thursday. Although she prefers smaller adjustments, she said a larger increase could be necessary if the Fed falls behind. Support for further tightening also came earlier this week from Dallas Fed President Lorie Logan and Philadelphia Fed President Anna Paulson.

A 0.3% monthly core inflation reading, compared with a forecast of 0.2%, was reported in Tuesday’s US inflation release. Ahead of the data, Fed Governor Christopher Waller had said that a reading around 0.3% could make a half-point rate rise in December a possibility.

The Reserve Bank of Australia (RBA), by contrast, has indicated that a pause may follow last week’s 25 basis point increase in the cash rate to 4.85%, its fifth rise this year. An explicit reference to further increases was removed by the RBA, while Governor Michele Bullock said the time had come to assess the economy’s response to higher borrowing costs.

At 5.3% in November, Australian consumer inflation expectations were unchanged and remained well above the RBA’s 2%-3% inflation target range. Conducted by the Melbourne Institute, the survey gauges the price increases households anticipate over the next 12 months. Friday’s US Producer Price Index (PPI) is now the next inflation release in focus for traders.