The RBA raised interest rates to 4.85%, yet a split vote indicates a possible pause in December. High Australian inflation persists; however, the less hawkish guidance from the central bank continues to exert downward pressure on the currency. The US Dollar finds support amid market caution; however, declining bond yields and political gridlock constrain its potential for further appreciation. AUD/USD remains subdued after registering over 1% losses the previous day, trading around 0.6910 during Asian hours on Friday.
The Australian Dollar experienced a decline relative to the US Dollar as the prospect of additional interest rate increases was tempered by a more dovish outlook from the Reserve Bank of Australia. On November 3, Australia’s central bank increased its cash rate by 25 basis points to 4.85%. The decision, which was split 6–3, saw three policymakers advocating for no change. Additionally, the removal of explicit language concerning future tightening suggests a potential pause in December. Nevertheless, RBA Deputy Governor Andrew Hauser indicated at the Australian National University in Canberra on Thursday that inflationary pressures continue to be significantly elevated.
Meanwhile, the US Dollar gained traction amid pervasive market caution as investors anticipate the forthcoming US Nonfarm Payrolls report, which is poised to significantly influence market expectations regarding the Federal Reserve’s policy decision in December. However, that dollar support was offset by a number of contrasting influences. Recent declines in US bond yields and persistent optimism regarding diplomatic advancements with Iran have contributed to a weakening of the safe-haven greenback. Furthermore, the Democrats’ victory has heightened expectations of political gridlock in Washington, potentially constraining government spending and ultimately resulting in slower economic growth.
Strategists argue that the broader macro backdrop continues to favour the Dollar, noting that “with US growth still solid, inflation sticky and the Fed on track for further tightening, we retain our view that the USD should remain supported, albeit with greater two-way risks.” They add that a Democratic Senate “should also strengthen the institutional guardrails around Fed independence by making it harder for the administration to confirm additional allies to the Federal Reserve Board,” reinforcing their view that policy continuity at the Fed will underpin the currency even as market volatility around the outlook increases.
