The weakening of the Australian dollar: How the Fed's shift in stance is impacting AUD?

On Monday, the Australian dollar again depreciated against the US dollar, hovering around 0.6520 at one point. Behind this seemingly simple exchange rate fluctuation is actually a fierce game of expectations between two major central banks’ policies—expectations of no rate cut from the Reserve Bank of Australia (RBA) and the rapid disintegration of bets on a Federal Reserve rate cut.

The Federal Reserve Hardens Its Stance, the US Dollar Rebounds

Recent data show an interesting shift: a week ago, the market believed there was a 67% chance of a Fed rate cut in December, but now that figure has fallen to 46%. The trigger for this change is straightforward—recent remarks from Fed officials have sharply cooled expectations of a rate cut.

Kansas City Fed President Jeffrey Schmid said on Friday that the current Fed policy is “moderately restrictive” and should “resist demand growth.” St. Louis Fed President James Bullard also stated that interest rates are now closer to neutral rather than restrictive, emphasizing that “there is limited room for easing.” Such statements imply that the probability of the Fed holding steady for now is increasing.

The most direct manifestation is the strengthening of the US Dollar Index (DXY), which is currently hovering around 99.40. Whenever market expectations for a Fed rate cut diminish, the dollar tends to be the biggest winner.

RBA Maintains Hawkish Stance, the AUD Lacks Support

In contrast to the hard stance of the Fed, the Reserve Bank of Australia (RBA) is also not rushing to cut rates. Data from the ASX 30-day interbank cash rate futures show that the market assigns only a 6% probability of the RBA lowering rates from 3.60% to 3.35% in December—essentially meaning “no rate cut.”

RBA Deputy Governor Andrew Housser admitted last week that monetary policy “remains restrictive,” although the committee continues to debate this issue. The implication is that the RBA is unlikely to change its policy stance in the short term.

The only positive news for the AUD comes from domestic employment data. In October, Australia’s unemployment rate fell from 4.5% in September to 4.3%, well below the expected 4.4%. Employment growth was also strong, with 42.2K new jobs added that month, far exceeding the expected 20K. Full-time employment increased by 55.3K, demonstrating resilience in the labor market. However, this is not enough to offset the pressure from the rising dollar.

Technical Outlook: Looking for Breakouts in Rectangular Consolidation

From the candlestick chart, the AUD/USD currency pair is consolidating within a rectangular range, reflecting sideways movement. The price is hovering around 0.6520 near the 9-day exponential moving average, indicating short-term momentum is stable.

The upper boundary of this rectangle is around 0.6630. A breakout above this level could clear the way for an upward move in the AUD. If a breakout occurs, the 13-month high of 0.6707 (last seen on September 17) could be the next target.

On the downside, risks are also significant. The lower support boundary of the rectangle is around 0.6470. If broken, the AUD could face further downward pressure. Below that, the five-month low of 0.6414 from August 21 remains a key support level.

Global Perspective: Mixed Economic Data Makes Direction Difficult

From a global economic perspective, markets are digesting a series of mixed signals. Weak labor data from the US private sector, with ADP reports showing a slowdown in the labor market; 153,074 US employer layoffs in October, higher than the previous month. Meanwhile, the US government shutdown has officially ended (Donald Trump signed a funding bill on Thursday), and a series of economic data are yet to be released.

In China, October retail sales grew by 2.9% year-over-year, slightly below expectations but still positive; industrial production increased by only 4.9% YoY, below the expected 5.5%; fixed asset investment declined by 1.7% YoY, far below the expected -0.8%. The National Bureau of Statistics of China stated that it will continue to foster new productivity, with supply and demand gradually improving, and CPI returning to positive territory in October. This indicates that China’s economy is in the process of bottoming out.

As a risk asset, the AUD continues to be under pressure amid uncertain global growth prospects and rising US dollar expectations.

Future Outlook for the AUD Against Related Currencies

In the short term, the AUD lacks upward momentum as both major central banks are not rushing to cut rates. The continued hawkish stance of the Fed and the strong US dollar are the biggest obstacles for the AUD. However, the resilience of domestic employment data provides some support, preventing a larger decline.

The key to the AUD/USD trend still depends on the outcome of the December Fed meeting—if the Fed ultimately chooses to hold steady, the dollar will continue to benefit. Meanwhile, markets are waiting for more economic data to verify the true state of global growth, which will directly influence demand expectations for the AUD and other commodity currencies.