AUD/USD experiences a decline as market participants exhibit a lack of consensus regarding a potential Federal Reserve rate increase in September, particularly in light of upcoming crucial inflation data releases. Despite the increase in oil prices, the probability of a Federal Reserve rate hike in September decreased from 52% to almost 48%. MUFG and Westpac caution that energy risks may prompt increases in RBA rates, whereas NAB anticipates that rates will remain steady until mid-2027 before potential cuts. AUD/USD has experienced a depreciation following a period of modest gains the previous day, currently trading at approximately 0.7060 during the Asian trading hours on Wednesday. The currency pair declines as the US Dollar rises in anticipation of a significant inflation report. Traders are closely monitoring the forthcoming reading, as it is anticipated to significantly influence the Federal Reserve’s next interest rate decision.
Market expectations remain split regarding the central bank’s rate trajectory after its decision to maintain rates in July. Despite the upward pressure from increasing crude oil prices that has sparked discussions for a more assertive policy approach, the likelihood of a 25-basis-point Fed rate hike in September has diminished marginally, now standing at approximately 48% as per the CME FedWatch Tool, a decrease from 52% the day prior. The Greenback receives support from geopolitical uncertainty surrounding a potential diplomatic deal between the US and Iran. Market sentiment experienced a temporary uplift following comments from Pakistan’s defence minister, suggesting that discussions between Washington and Tehran concerning the Strait of Hormuz were progressing. This was further supported by reports indicating that parallel negotiations between Iran and Oman had advanced significantly. However, US President Donald Trump insisted that Tehran must pay reparations to the victims of attacks associated with the Islamic Republic, injecting renewed caution into the markets.
The Reserve Bank of Australia unanimously maintained the cash rate at 4.35% in August; however, there is a divergence among major forecasters regarding the future outlook. MUFG cautions that escalating energy prices, spurred by tensions between the US and Iran and the closure of the Strait of Hormuz, pose a risk of a global inflation shock, which could compel the RBA to raise rates as soon as September. Westpac describes the situation as a “hawkish hold,” contending that softer domestic data has diminished the clear tightening bias, while the increasing energy risks suggest that a rate hike later in the year remains a possibility. Conversely, NAB assesses that conditions are adequately restrictive, projecting consistent growth and a maintenance of rates thru 2026 prior to anticipated cuts in mid-2027.
BNY’s Wee Khoon Chong highlights that the domestic backdrop has turned more challenging, with “financial conditions have tightened, consumer spending is slowing gradually, housing momentum has softened, and labor market conditions have eased a little more than expected.” In contrast to the softer tone in activity, Chong observes that the RBA continues to describe its policy as somewhat restrictive and anticipates that inflation will only revert to the midpoint of its target by late 2027, thereby reinforcing a cautious outlook for the Australian dollar and AUD/USD.
