AUD Holds Firm as Traders Weigh Fed Hike and RBA Calls

Key Moments

Fed Hike and Political Pressure Shape Dollar Dynamics

AUD/USD is trading close to 0.7090 during Thursday’s early Asian session, extending its recent advance as participants continue to evaluate the latest move by the Federal Reserve and comments from US President Donald Trump. The next focus for US data will be the release of Initial Jobless Claims later on Thursday.

On Wednesday, the Federal Reserve raised its policy rate to a range of 3.75% to 4.0%, the first increase in three years and a move that had been widely anticipated. Fed Chair Kevin Warsh said that the decision was taken because “inflation is too high and has been for too long”, describing it as a “sober” and “responsible decision.” He also indicated that rates could rise further to counter persistent price pressures. According to the CME FedWatch tool, money markets reflected about a 49.8% probability of another Fed rate hike in October.

“That’s hawkish. If the chair thinks policy is accommodative, then you’ve got more work to do,” said Michael Gapen, chief US economist for Morgan Stanley.

Despite the Fed’s tightening stance, Trump openly called for an aggressive policy reversal, urging the central bank to cut rates to 1% “or less.” He wrote in a Truth Social post: “We are ‘carrying’ almost every country in the World, and that cannot go on any longer.”

IMF Backs Hawkish Bias at the RBA

In Australia, the Reserve Bank of Australia has kept the Official Cash Rate at 4.35% after implementing three consecutive hikes earlier in the year. Market-based pricing via the RBA Rate Tracker indicates that investors now see nearly a 76% probability that the RBA will raise the OCR to 4.60% at its next Board meeting.

The International Monetary Fund has endorsed a readiness to tighten further, stating that the RBA should be prepared to lift interest rates as inflation risks remain skewed to the upside. The IMF also noted that fiscal policy could assist disinflation efforts if the government were to restrain spending.

UOB Keeps Focus on 0.7100 as Key AUD/USD Support

Strategists at UOB Group continue to hold a guarded medium-term outlook for AUD/USD. They reiterate their “1-3 weeks view” that, “while further weakness is not ruled out, short-term conditions are oversold, and AUD must close below 0.7100 before a move to 0.7050 can be expected.”

They further state that the “likelihood of AUD closing below 0.7100 will remain intact as long as AUD holds below the ‘strong resistance’ at 0.7175,” noting that both the support and resistance levels are unchanged from their previous assessment.

Technical Picture: Bias Remains Bearish Despite Recent Stabilization

From a technical perspective, AUD/USD is maintaining a negative near-term profile on the daily chart, with price action still trading below the middle band of the 20-day Bollinger Bands. The 100-day simple moving average is positioned just under current levels, providing initial support.

Momentum indicators show signs of cooling. The 14-day Relative Strength Index has drifted toward the low-40s, which points to fading bullish momentum rather than clear oversold conditions.

On the upside, immediate resistance is located at the lower Bollinger band around 0.7095, followed by the middle Bollinger band near 0.7166 and the upper band close to 0.7240, together forming a broad overhead barrier. On the downside, the 100-day simple moving average at 0.7080 represents the first layer of support. A decisive move below this level would likely pave the way for lower daily closes and reinforce the existing bearish tone.

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

Fundamental Drivers of the Australian Dollar

The Australian Dollar (AUD) is influenced by several core macroeconomic and market factors, with monetary policy set by the Reserve Bank of Australia playing a central role. As a resource-rich economy, Australia is also highly sensitive to commodity markets, particularly Iron Ore, which is its largest export. The performance of the Chinese economy is another crucial input given China’s role as Australia’s largest trading partner. Domestic inflation dynamics, overall growth, and the country’s Trade Balance are additional elements that shape AUD performance. Broader risk sentiment is also important, as risk-on conditions tend to support the AUD, while risk-off episodes usually weigh on the currency.

RBA Policy Transmission to the AUD

The RBA impacts the AUD primarily through its control of short-term interest rates, specifically the rate at which Australian banks lend to each other. This benchmark influences borrowing costs across the economy and is adjusted to keep inflation within the central bank’s 2-3% target range. Higher relative interest rates compared with other major central banks generally favor the AUD, while lower relative rates tend to be negative. The RBA can also deploy quantitative easing or tightening to alter credit conditions, with quantitative easing typically seen as AUD-negative and quantitative tightening as AUD-positive.

China, Iron Ore, and Trade Balance as Structural AUD Catalysts

Because China is Australia’s largest trading partner, fluctuations in Chinese economic activity can have a direct effect on AUD valuation. Stronger Chinese growth often translates into higher demand for Australian raw materials, goods, and services, which supports the currency. Conversely, weaker-than-expected Chinese growth typically dampens demand and can pressure the AUD. Surprises in Chinese growth indicators therefore tend to feed quickly into AUD and related crosses.

Iron Ore, identified as Australia’s largest export with China as the main destination, is another critical driver. Rising Iron Ore prices are generally associated with increased demand for AUD, while falling prices tend to have the opposite effect. Higher Iron Ore prices also improve the likelihood of a positive Australian Trade Balance, which is supportive for the currency. In general, a Trade Balance surplus – where export revenues exceed import costs – underpins the AUD, whereas a deficit can act as a headwind.