Australia’s manufacturing, services, and composite PMIs all experienced a decline in September, exerting significant pressure on the AUD. The US Dollar gains strength as the Federal Reserve signals potential additional interest rate hikes this year. Markets are currently reflecting an approximately 89% probability of a Federal Reserve interest rate increase in December, in anticipation of the forthcoming US PMI data. AUD/USD experiences a decline for the third consecutive day, currently trading near 0.7110 during the Asian session on Wednesday. The Australian Dollar remains subdued against the US Dollar following the release of September’s preliminary S&P Global Purchasing Managers’ Index data for Australia, keeping the AUD/USD pair under pressure.
The slowdown was widespread across essential sectors: Manufacturing declined into contraction territory at 49.3, a decrease from the previous 52.0, while the Services PMI softened to 51.4 from 53.2. Consequently, Australia’s Composite PMI decreased to 50.8 from its previous reading of 52.7. Compounding the pressure on the AUD/USD pair is a strengthening US Dollar, driven by the Federal Reserve’s hawkish policy outlook. The US central bank has recently increased its benchmark interest rate target by 25 basis points, bringing it to the 3.75%-4.00% range. Policymakers have indicated the possibility of an additional rate hike before the year’s conclusion.
Financial markets are currently reflecting this trajectory, with the CME FedWatch Tool suggesting a probability of approximately 89.2% for a rate increase in December, as traders focus on the forthcoming preliminary US PMI data release scheduled for later on Wednesday. Fed’s Collins conveyed a distinctly more hawkish stance, reflected in an FXS Speechtracker score of 8.1, surpassing the historical average of 6.6, highlighting a heightened conviction regarding recent policy actions. The emphasis on supporting last week’s rate hike, the increased likelihood of inflation remaining significantly above 2%, and a “somewhat more restrictive” federal funds rate indicate a distinct inclination toward sustaining tighter conditions, particularly in light of the labour market being perceived as more stable.
Overall, the speech underscores the Federal Reserve’s commitment to achieving a prompt return to price stability following a prolonged phase of elevated inflation, a context generally favourable for the Dollar and yields. The FXS Fed Sentiment Index increased by 0.53 points to 150.49, remaining solidly in hawkish territory and aligning with the heightened FXS Speechtracker reading. This upward move in the FXS Fed Sentiment Index confirms that Collins’ remarks have incrementally strengthened market expectations for sustained restrictive policy, a configuration that tends to underpin the Dollar against lower-yielding peers.
