Australian Dollar slips below 0.6800 as hawkish Fed weighs; attention turns to Chinese data

• Selling pressure takes AUD/USD towards 0.6775 in early Asian trading on Monday.
• US Treasury yields and the US Dollar gain as expectations build for a larger Fed rate increase.
• Monday’s Chinese economic releases draw traders’ attention before the RBA Minutes.

The Australian Dollar (AUD) comes under pressure against a firmer US Dollar (USD), with AUD/USD slipping towards 0.6775 in Monday’s early Asian trading. Hawkish remarks by Federal Reserve (Fed) officials underpin the US currency. For the next market cue, traders are looking to Monday’s Industrial Production and Retail Sales figures from China.

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 modest interest rate increases at a steady pace, arguing that this approach better managed economic uncertainties.

The prospect of a larger-than-usual Fed rate increase next month is under consideration among traders following hawkish commentary from officials and the latest US inflation reading, which exceeded expectations. According to the CME FedWatch tool, market pricing assigns roughly a 93.5% probability to a 25-basis-point increase next month.

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

Can AUD find support as RBA tightening nears its limit and Fed repricing widens the rate gap?

The limits to further RBA tightening are weighing on the currency’s support, according to analysts at MUFG, who observe that 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 increases have already been delivered by the RBA this year, they point out, taking the policy rate to “4.85%…the highest since 2008 when the RBA was cutting rates into the Global Financial Crisis.” Following this front-loaded tightening, MUFG notes 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.”

Considerably more tightening is expected from the Fed, by comparison. 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 Aussie has weakened sharply as expectations have shifted. MUFG observes 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.” Increasing resistance within the RBA to additional tightening was also evident in its latest decision: “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 economic releases are already showing the effects of higher borrowing costs. In MUFG’s assessment, “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.”

These conditions leave the Australian Dollar particularly exposed in MUFG’s view: “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 characterisation as “high-beta and hence [it] would underperform in a scenario of tightening financial conditions and a rise in financial market volatility.” They see that vulnerability reflected in recent trading, noting that “in the recent 6-day period of AI selling through to 5th November, AUD was the worst performing G10 currency.” While 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.”

Does Schmid’s inflation warning strengthen the Fed’s hawkish stance?

A somewhat firmer hawkish tone emerges from Fed official Schmid’s remarks, reflected in a 7/10 FXS Speechtracker score against his historical average of 6.9/10. He stresses that “work containing inflation has only gotten harder” and describes inflation as “uncomfortably above” the 2% target. Schmid points out that inflation would remain around 3% even without energy and that the labour market is broadly balanced, presenting the challenge as widespread price pressures rather than wage-led inflation. He also highlights demand management as the Fed’s principal tool, rejecting the notion that policy should target individual prices, including those of AI-related technology goods.

An increase of 1.00 points took the FXS Fed Sentiment Index to 148.44, placing it firmly in hawkish territory and aligning with the slightly higher FXS Speechtracker reading. The rise suggests that markets should anticipate a continued tightening bias from the Fed. With policy still directed at curbing persistent inflation, the Dollar is likely to retain support.

Technical Analysis: Can AUD/USD recover while below the 100-day SMA?

A clearly bearish near-term structure remains visible on the daily AUD/USD chart, as the pair continues to fall below both the 100-day simple moving average (SMA) and the 20-day SMA at the centre of the Bollinger Bands. Trading just above the lower Bollinger Band, the pair has a Relative Strength Index (14) reading of around 30.6, close to oversold territory. Although downside pressure remains dominant, this suggests selling momentum may be approaching exhaustion rather than gathering strength.

Any recovery would first encounter resistance near 0.6950 at the Bollinger 20-day SMA. Beyond that lie the 100-day SMA at 0.7025 and the upper Bollinger Band at 0.7135, together creating a wide supply zone that would limit a corrective rebound. Immediate downside support, meanwhile, lies at the lower Bollinger Band of 0.6768. A conclusive break below that level would pave the way 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.)