10-month low: Australian Dollar falls as Fed tightening bets build

• The Australian Dollar reaches its lowest level since January. Risk aversion and US Dollar strength put pressure on the pair.
• Expectations of additional interest rate rises strengthen following hawkish Fed comments and higher US inflation.
• After lifting interest rates to 4.85% last week, the RBA indicates that a pause in tightening may follow.

AUD/USD trades near 0.6808 at the time of writing. The pair is down 0.60% on the day, extending its decline on Thursday to the lowest level since January. Investors are seeking safety in the US Dollar (USD), while expectations of a hawkish Federal Reserve (Fed) provide additional backing for the currency.

Reports of Nvidia CEO Jensen Huang’s resignation weighed on US technology stocks, supporting a US Dollar rebound from a small intraday decline. Caution also increased among investors after US President Donald Trump stated on Truth Social that the US does not need an agreement with Iran.

A new year-to-date peak of 103.19 is reached by the US Dollar Index (DXY), which measures the currency 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 the preferred outcome, although a larger 50 bps move retains a small probability. With more Fed officials advocating higher rates to contain inflation, markets anticipate additional tightening into 2027.

Restrictive policy is needed to reduce inflation, Cleveland Fed President Beth Hammack said on Thursday. While preferring smaller steps, she warned that 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 monthly core inflation reading of around 0.3% could make a half-point December rate rise an option, Fed Governor Christopher Waller said ahead of Tuesday’s US inflation release. The core figure subsequently stood at 0.3%, exceeding the 0.2% forecast.

The Reserve Bank of Australia (RBA), by contrast, has indicated a possible pause following last week’s 25 basis points increase in its cash rate to 4.85%. That marked 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. The Melbourne Institute survey gauges households’ expectations for price increases over the next 12 months. Friday’s US Producer Price Index (PPI) is now the next inflation indicator in focus for traders.