As US bond yields surge, Australian Dollar falls further against US Dollar

• Riskier currencies lose favour as US bond yields climb, pushing the Australian Dollar further lower.
• Rate increases at the Fed's December, January and March policy meetings are expected by TD Securities.
• Monetary tightening by the RBA appears to have reached its end.

Pressure on the Australian Dollar (AUD) persists as sharply higher United States (US) Treasury yields erode demand for riskier assets, including the currency. During European trading on Friday, the Aussie extends its run of losses against the US Dollar (USD), slipping 0.15% to around 0.6795.

Following a rise of almost 5.5% over the past two trading days, 10-year US bond yields remain elevated. At the time of writing, 10-year US Treasury yields are holding near a three-week high of $5.13%.

Why are US bond yields moving higher?

The latest US inflation report was the main catalyst for the surge in US Treasury yields, according to Deutsche Bank strategists. They point out that “the monthly core CPI print for October was above consensus at +0.30% (vs. +0.2% expected).” Putting the figures in context, they 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.”

With US inflation at risk of remaining elevated, market experts have been compelled to revisit their expectations for interest rate increases by the Federal Reserve (Fed).

A more hawkish view of the near-term policy trajectory has been adopted by TD Securities, according to its strategists. Instead of the firm's previous forecast for increases only in December and March, it now anticipates "25bp hikes in December, January, and March,".

At the same time, market expectations that the Reserve Bank of Australia (RBA) has completed its interest rate cycle are contributing to the Australian Dollar's underperformance.

Can the AUD retain support as RBA tightening approaches its limits?

Support from Australia's earlier monetary tightening appears to be fading, in the view of MUFG analysts. Although they acknowledge that the “pre-emptive nature of monetary tightening in Australia has benefitted the Australian Dollar,” their current assessment is that “time appears to have run out for providing support for the currency”. Investors, they say, see the RBA as “running out of scope for additional rate hikes at a time when investors are reappraising their views on additional Fed rate hikes.” To illustrate how heavily tightening has been front-loaded, the analysts point out 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,”. The consequence of that pre-emptive approach is that “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,”. This strengthens the argument that the domestic rate impulse underpinning the Aussie is largely spent, just as expectations for US rates are being revised upwards.

Attention now turns to Tuesday's release of the minutes from the RBA's October policy meeting.

AUD/USD Technical Analysis: Can the Pair Regain the 20-Day EMA?

A bearish near-term bias remains evident on the daily AUD/USD chart, with the pair at 0.6795 and extending its decline below the 20-day exponential moving average (EMA) of 0.6930. That average now provides immediate overhead resistance. Having failed to recover above the EMA, the pair is likely to face selling on rallies. Meanwhile, the Relative Strength Index (14), at 31.8 and just above oversold territory, signals continued downward pressure, with 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 the first resistance level, the 20-day EMA near 0.6930, would be required. Below the current price, the available dataset offers no clear technical support levels. Traders may therefore consider previous price lows and psychological levels below 0.6800 as possible demand zones. Even so, the prevailing structure indicates that such support would remain vulnerable for as long as the pair stays below the EMA.

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