Australian Dollar falls below 0.6800 as hawkish Fed weighs; focus turns to Chinese data

• At around 0.6775, AUD/USD trades lower in early Asian dealing on Monday.
• US Treasury yields and the US Dollar advance as expectations build for a larger Fed rate increase.
• Monday’s Chinese economic releases come into focus before the RBA minutes.

With China’s Industrial Production and Retail Sales figures due on Monday, traders are looking for a fresh catalyst as AUD/USD slips towards 0.6775 in early Asian trading. Hawkish remarks by Federal Reserve (Fed) officials have helped the US Dollar (USD) edge up against the Australian Dollar (AUD).

Speaking on Sunday, Kansas City Fed President Jeff Schmid said the central bank had both the tools and the responsibility to tackle price pressures that are “running too hot,” adding that it “has some work to do on inflation.” Boston Fed President Susan Collins, meanwhile, said she favoured a consistent pace of modest interest rate rises, judging that approach better suited to managing economic uncertainty.

Following the latest stronger-than-expected US inflation figures and hawkish commentary from Fed officials, traders are considering whether next month could bring a larger-than-usual rate increase. The CME FedWatch tool puts the market-implied probability of a 25-basis-point rise next month at roughly 93.5%.

Whether to raise interest rates for the fifth time in a year divided board members at the Reserve Bank of Australia (RBA). Due on Tuesday, the minutes of the RBA’s November meeting will explain in detail the decision to increase the cash rate to 4.85%, its highest level in 18 years.

AUD loses rate support as RBA tightening nears its limit and Fed expectations shift

For MUFG analysts, the Australian Dollar’s support from early policy tightening is fading: the “pre-emptive nature of monetary tightening in Australia has benefitted the Australian Dollar but time appears to have run out for providing support for the currency as investors conclude that RBA is running out of scope for additional rate hikes at a time when investors are reappraising their views on additional Fed rate hikes.” Five RBA increases have already taken place this year, they note, bringing the policy rate to “4.85%…the highest since 2008 when the RBA was cutting rates into the Global Financial Crisis.” With tightening having been front-loaded, MUFG observes that “the OIS curve through to Q4 2027 shows mostly a flat curve but a probability of a rate cut (-15bps priced) in Q3-Q4 next year.”

Expectations for the Fed point to considerably more tightening ahead. As MUFG puts it, “given the Fed has raised rates just once, the market has another 85bps of hikes priced – that’s a 100bp swing in expected policy rates by Q4 next year.” Relative interest rate support for the Australian Dollar has weakened sharply as a result. The bank notes that “the 2-year AU-US swap spread has moved 100bps lower since peaking in early April and has dropped 30bps just in the last week or so.” At the same time, the latest RBA decision exposed mounting internal reluctance to tighten further: “the RBA vote when it hiked this month (6-3) underlined the growing opposition to hikes and RBA Governor Bullock signalled a pause to assess given some of the tightening will not have hit the real economy.”

Domestic figures are already providing evidence that higher borrowing costs are taking effect. MUFG highlights that “where you’d expect to see it first has started to come through – Australian home loans plunged 15.5% in Q3, double what was expected and the biggest drop in the data series back to 2002.”

In this environment, MUFG’s assessment is that “we view AUD as probably the most vulnerable currency in a sharp AI-related sell-off.” The analysts point to its “relatively high macroeconomic exposure,” its “energy and commodity exposures that would result in a negative terms of trade hit,” and its “high-beta and hence [it] would underperform in a scenario of tightening financial conditions and a rise in financial market volatility.” They see recent trading as further evidence of that exposure: “in the recent 6-day period of AI selling through to 5th November, AUD was the worst performing G10 currency.” Although MUFG acknowledges that “despite the AUD sell-off from the most recent high in September, AUD is still the 2nd best performing G10 currency on a year-to-date basis,” it warns that “if the AI sell-off intensifies again, AUD remains more vulnerable than other G10 currencies.”

Schmid’s inflation warning strengthens the Fed’s hawkish stance

Inflation remains “uncomfortably above” the 2% target, according to the Fed’s Schmid, who stresses that “work containing inflation has only gotten harder”. His message is slightly more hawkish than usual: the FXS Speechtracker score of 7/10 is marginally higher than his historical average of 6.9/10. Schmid notes that inflation would remain around 3% even without energy and describes the labour market as largely balanced, presenting price pressures as broad-based rather than wage-driven. He also identifies demand management as the Fed’s principal tool, rejecting the suggestion that policy should target individual prices, including those of AI-related technology goods.

A 1.00-point increase took the FXS Fed Sentiment Index to 148.44, leaving it firmly in hawkish territory and in line with the slightly above-average FXS Speechtracker reading. The rise suggests markets should anticipate a continued tightening bias from the Fed. With policy still directed at containing persistent inflation, the Dollar is likely to retain support.

Technical Analysis: AUD/USD stays bearish beneath the 100-day SMA

Trading below both the 100-day simple moving average (SMA) and the Bollinger Bands’ 20-day SMA midline, AUD/USD continues to fall on the daily chart, leaving the near-term technical picture firmly bearish. The pair remains just above the lower Bollinger Band. Meanwhile, a Relative Strength Index (14) reading of around 30.6 is close to oversold territory, indicating that selling pressure remains dominant but may be approaching exhaustion rather than gathering pace.

Any recovery would first encounter resistance at the Bollinger 20-day SMA near 0.6950. Above that lie the 100-day SMA at 0.7025 and the upper Bollinger Band at 0.7135, together creating a broad supply zone that would limit a corrective rebound. Immediate support, meanwhile, sits at 0.6768, the lower Bollinger Band. A clear break below that level would leave room for the downtrend to extend; remaining above it would preserve the possibility of a modest recovery towards 0.6950.

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