Australian Dollar retreats towards March lows amid diverging Fed and RBA outlooks

• Diverging Fed and RBA policy expectations leave AUD/USD close to its lowest levels since March.
• Above-forecast US inflation, alongside hawkish Fed comments, pushes the US Dollar closer to its annual high.
• Following its fifth rate increase this year, the RBA tones down its guidance on further tightening.

At around 0.6846 at the time of writing, AUD/USD is down 0.28% on Wednesday and remains close to levels last recorded in March. Weighing on the Australian Dollar (AUD) are growing expectations that monetary policy at the Federal Reserve (Fed) and the Reserve Bank of Australia (RBA) could follow different paths over the coming months.

Stronger-than-forecast US consumer inflation and hawkish comments from Fed officials have increased expectations of more aggressive interest rate rises, supporting demand for the US Dollar. Up 0.68% on the day, the US Dollar Index (DXY) is advancing for a second consecutive day towards its year-to-date peak of 102.94, reached in October. The index measures the US currency against a basket of six major currencies.

October’s US Consumer Price Index (CPI) increased by 0.4% MoM, exceeding the 0.3% forecast, although the pace eased from September’s 0.6%. Excluding food and energy, core CPI advanced 0.3%, unchanged from September and above expectations of 0.2%.

Hawkish Fed comments reinforce December rate rise bets as political pressure concerns recede

For analysts at Rabobank, the response to “the hawkish commentary from Fed officials yesterday, including those from Waller that put the risk of a 50-bps rate hike on the table, says more than just the obvious.” They observe that “the market is now fully priced for a December rate hike,” but place particular weight on the fact that the comments were received “with no real speculation that the Fed would be pressured by political forces not to raise rates,” indicating less attention to possible political interference in the Fed’s policy trajectory.

Support for additional monetary tightening also came from Dallas Fed President Lorie Logan and Philadelphia Fed President Anna Paulson, among other Fed officials. Meanwhile, Fed Vice Chair for Supervision Michelle Bowman emphasised the importance of bringing inflation under control.

In Australia, borrowing costs reached their highest level since 2008 after the RBA increased its cash rate by 25 basis points (bps) to 4.85% at its November meeting, in line with expectations. This was the central bank’s fifth increase this year, with policymakers confronting inflation driven by higher oil prices. However, its guidance became less hawkish as it removed an explicit reference to further increases if necessary. In Governor Michele Bullock’s words, it was “probably best to pause and assess incoming data.”

According to OCBC analysts, the “market has started to price in some chance of easing towards the latter part of 2027,” while cash rate futures were “last priced a 74% chance of a 25bp cut by December 2027.” Against that shift in pricing, OCBC maintains its base case “for a 25bp cut in 4Q2027.”