Australian Dollar softens to near 0.7000 on hawkish Fed signals, RBA rate decision looms

The AUD/USD pair loses momentum to near 0.7010 during the early Asian session on Monday. The US Dollar (USD) strengthens against the Australian Dollar (AUD) on rising US Treasury yields and growing bets on further Federal Reserve (Fed) interest rate hikes. The Reserve Bank of Australia (RBA) will be in the spotlight later on Tuesday. 

Hawkish remarks from Fed officials have fueled speculation about additional interest rate increases following a recent rate hike to the 3.75%-4.00% range. Cleveland Fed President Beth Hammack said on Friday that she is worried that persistently high inflation risks conditioning the American public to accept elevated prices as the ‌norm, adding the central bank cannot let that happen.

Meanwhile, Philadelphia Fed President Anna Paulson said, "Some modest further tightening may be warranted.” Markets are now pricing in nearly a 65.9% chance of a Fed October benchmark rate hike, up from 57.6% a week earlier and 9.4% a month earlier, according to the CME FedWatch tool.

The RBA is likely to deliver a 25 basis points (bps) rate hike to combat sticky inflation. That would bring the Official Cash Rate (OCR) to 4.60%, the highest level since November 2011. Traders will take more cues from Governor Michele Bullock’s press conference after the rate decision whether the Australian central bank is prepared to deliver back-to-back hikes in November or prefers to watch and wait through the rest of the year.

“The risk sits with the need to tighten monetary policy further beyond September given the inflation backdrop,” said Belinda Allen, head of Australia Economics at Commonwealth Bank of Australia. “But it is not an easy decision to push monetary policy further into restrictive territory,” Allen added. 

AUD resilience underpinned as RBA tightening odds rise despite softer jobs headline

Brown Brothers Harriman’s Elias Haddad notes that Australia’s latest labour force data delivered a mixed signal, with the “unemployment rate unexpectedly rose 0.1ppt to 4.6%, which was above consensus and RBA year-end projection of 4.5%.” However, BBH stresses that “the increase in the jobless rate largely reflects a higher participation rate suggesting some tightness in the labor market persists,” reinforcing the view that underlying conditions remain firm.

Against this backdrop, Haddad argues that the “bottom line: rising odds of additional RBA hikes limits policy divergence with the Fed and supports AUD/USD.” He also highlights that “Australia’s strategic exposure to commodities linked to energy, AI, and defense remains an important long-term tailwind for AUD,” providing an additional structural underpinning for the currency beyond the near-term policy outlook.

Hammack flags inflation mindset risk, keeps Fed tone firmly hawkish

Fed’s Hammack delivered a moderately hawkish message, with a 7.2/10 FXS Speechtracker score that is slightly softer relative to the historical average of 7.5/10 but still clearly above neutral. The emphasis on the “biggest risk” being the formation of an inflationary mindset, alongside comments that growth is holding up and the job market is stable, underscores concern that persistent above-target inflation and ongoing capital expenditure could entrench price pressures. The warning that policy must remain at a restrictive stance if progress on inflation stalls reinforces a bias toward keeping rates elevated for longer, supporting the Dollar on balance.

The FXS Fed Sentiment Index slipped by 0.34 points to 147.72, indicating a modest pullback in perceived hawkishness even as the index remains deep in hawkish territory above the 100 neutral line. This configuration—high level but negative change—suggests the Fed is still firmly skewed toward restrictive policy, yet markets may interpret Hammack’s tone as marginally less aggressive compared to the established baseline.

Technical Analysis: AUD/USD keeps a bearish vibe in the near term

In the daily chart, AUD/USD holds below the 100-day simple moving average (SMA) and the Bollinger middle band, keeping the near-term bias bearish despite a modest intraday bounce off recent lows. Price is only marginally above the Bollinger lower band support, while the Relative Strength Index (RSI) at 33 is hovering near oversold territory, suggesting selling pressure is stretched but not yet reversed.

On the topside, initial resistance is seen at the 100-day SMA around 0.7070, with the next cap at the Bollinger middle band close to 0.7130, ahead of the upper band near 0.7265. On the downside, a clear break below the Bollinger lower band at 0.7000 would open the door to further downside extension, while recovery attempts are likely to remain fragile as long as price trades under the 100-day SMA.