AUD/USD Price Forecast: H&S breakdown maintains downward pressure on the pair

• 0.6833 nears as AUD/USD falls and the Australian Dollar lags its peers.
• A December interest rate increase by the Fed is certain.
• The RBA’s monetary policy minutes and Governor Michele Bullock’s speech are firmly in focus for investors.

AUD/USD is trading around 0.6833. The Australian Dollar (AUD) is down 0.15% against the US Dollar (USD) in Thursday’s European session and is lagging its currency peers. Doubts among market experts over whether the Reserve Bank of Australia (RBA) will continue its monetary tightening cycle are weighing on the currency.

Mixed messages emerged from the RBA’s latest decision, according to analysts at OCBC Group Research. To support the rate increase, the statement said that “inflation remains elevated and recent data indicate that it is broadly based”. Yet it also recognised that “the increases in the cash rate target since the beginning of the year have tightened financial conditions. The economy is slowing, housing prices have fallen significantly and the unemployment rate has risen”.

The removal of “including increasing the cash rate target further if needed” from the statement also marks softer forward guidance from the RBA, OCBC notes. Its conclusion is: “We expect no more hike in this cycle, and the next policy move is likely to be a cut.”

Tuesday brings the minutes of the RBA’s October monetary policy meeting and a speech by Governor Michele Bullock. Investors will look to both for further signals on the policy outlook.

Broader US Dollar strength is adding to the pressure on AUD/USD. Having surrendered its earlier gains, the US Dollar Index (DXY) is little changed at around 102.86 at the time of writing. Earlier in the session, it reached a fresh 18-month high of 103.08.

103.08 high for Dollar Index as year-end Fed hike expectations strengthen

MUFG analysts report that the US Dollar has “continued to strengthen overnight,” taking the Dollar Index to “a fresh year-to-date high of 103.08.” In their assessment, the Dollar’s “renewed upward momentum has been encouraged by expectations that the Fed is likely to speed up the pace of rate hikes in response to the recent run of stronger US inflation data.” Turning to bond markets, they note that “the yield on the 2-year US Treasury has jumped high by around 33bps from the low at the end of last week although still remains below the peak set in September at 4.96%.”

December rate expectations have shifted, with MUFG observing that “a 25bps rate hike at the next FOMC meeting in December is now fully priced in, and market participants have moved further to price in small probability of larger 50bps hike.” The analysts also note that “there are currently around 28bps of hikes priced by December, and 43bps of hikes priced by the following meeting in January indicating that even if the Fed hikes by 25bps in December it is now expected to quickly follow up with another 25bps hike at the start of next year.”

This week’s remarks from Fed officials have reinforced the shift towards faster tightening. MUFG says those expectations have been “encouraged by hawkish comments this week by Fed officials.” Governor Christopher Waller, it notes, “stated he would consider voting for a larger 50bps hike in December,” while Dallas Fed President Lorie Logan, who currently holds a vote, said “the FOMC needs to implement at least two more 25bps rate increases” and “it may be possible to move more rapidly this winter than the FOMC has moved this fall.” Also cited is Chicago Fed President Austan Goolsbee, who gains a vote next year. He called the October CPI release “another distressing report, borderline disturbing,” drawing particular attention to services inflation, which “has remained persistently high.”

Greater significance may attach to another policymaker’s assessment: MUFG emphasises that “the updated views of New York Fed President John Williams could carry more weight.” The analysts refer to his recent comment that it is an “appropriate time to accumulate more information to help us determine what the appropriate stance of policy is to make sure we achieve a timely return to our 2% target.” A “larger 50bps hike to be delivered in December” is not MUFG’s expectation. Instead, its assessment is that “it is more likely now that the Fed could hike rates back-to-back in December and January.”

For the currency market, MUFG regards the changing policy outlook as “a development that will encourage the US dollar to trade at stronger levels heading into year end.” The analysts conclude that “a sharp tightening of US financial conditions and/or ongoing drop in energy prices would likely be required to significantly push back against market expectations for faster Fed hikes at the current juncture.”

0.6835 AUD/USD: Technical Outlook

At 0.6835 on the daily chart, AUD/USD retains a bearish short-term bias. Spot remains well below the 20-period exponential moving average (EMA) at 0.6947. Trading beneath that key trend measure, alongside the breakdown of the Head and Shoulders (H&S) chart pattern, suggests recent recoveries remain constrained. Meanwhile, the Relative Strength Index (14) is near 35 in weak territory. This points to moderate downward momentum, rather than fully oversold conditions.

The first upside hurdle is the neckline of the H&S pattern at 0.6900, ahead of the 20-period EMA at 0.6947. A convincing break back above the latter would be required to relieve near-term selling pressure and create scope for a wider corrective recovery. On the downside, losses could extend towards 0.6800.

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