Why is the Australian Dollar slipping towards March lows as Fed and RBA outlooks diverge?

• Pressure on AUD/USD keeps the pair near its weakest since March amid diverging Fed and RBA policy expectations.
• The US Dollar approaches its annual peak as above-forecast US inflation and hawkish Fed comments underpin demand.
• Following its fifth rate increase this year, the RBA tones down its guidance on additional hikes.

Selling pressure keeps AUD/USD close to its March lows on Wednesday, with the pair trading around 0.6846 at the time of writing, a decline of 0.28% for the day. 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 courses over the coming months.

Demand for the Greenback has strengthened as an upside surprise in US consumer inflation and hawkish comments from Fed officials reinforce expectations of more aggressive interest rate increases. Heading towards the year-to-date peak of 102.94 reached in October, the US Dollar Index (DXY) is up 0.68% on the day, adding to gains for a second consecutive day. The index measures the Greenback against a basket of six major currencies.

At 0.4% MoM in October, the increase in the US Consumer Price Index (CPI) exceeded the 0.3% forecast, although it moderated from September’s 0.6%. Excluding food and energy, core CPI advanced 0.3%, unchanged from September’s pace but above expectations of 0.2%.

Are Fed hawks reinforcing December hike bets as political pressure concerns ease?

Reduced concern about political interference in the Fed’s policy course is a key aspect of the market reaction, according to analysts at Rabobank. They highlight that 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.” In their assessment, “the market is now fully priced for a December rate hike,” while the comments were notably absorbed “with no real speculation that the Fed would be pressured by political forces not to raise rates,” pointing to less emphasis on possible political influence.

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

In Australia, borrowing costs reached their highest since 2008 after the RBA delivered an expected 25 basis points (bps) increase in its cash rate to 4.85% at the November meeting. This was the fifth hike this year, with policymakers confronting inflation driven by higher oil prices. However, the bank moderated its guidance by removing an explicit reference to further increases if required. As Governor Michele Bullock put it, it was “probably best to pause and assess incoming data.”

OCBC analysts reiterate their base case “for a 25bp cut in 4Q2027.” This is consistent with a shift in market pricing: they observe that the “market has started to price in some chance of easing towards the latter part of 2027,” and that cash rate futures “last priced a 74% chance of a 25bp cut by December 2027.”