RBA rate hike expectations lift Australian Dollar further ahead of Fed decision

• Expectations of higher Australian interest rates support the Australian Dollar on Friday, lifting it 0.20% against the US Dollar.
• October saw US manufacturing activity climb to a 53-month high, surpassing market forecasts.
• With inflation risks under scrutiny, investors expect the Fed to leave interest rates on hold on Wednesday.

A modest edge over the US Dollar (USD) keeps the Australian Dollar (AUD) on an upward path on Friday, despite strong economic releases from the United States (US). At the time of writing, AUD/USD is extending its advance to around 0.7035, a gain of 0.20% for the day, as expectations of further Reserve Bank of Australia (RBA) monetary tightening underpin the currency.

Persistent inflationary pressures have fuelled expectations that the RBA could increase interest rates again this year, lending support to the Australian Dollar. The prospect enhances the currency's appeal as investors weigh the two countries' diverging monetary policy paths.

Resilient US private-sector activity was evident in preliminary figures published on Friday by S&P Global. October's Manufacturing Purchasing Managers Index (PMI) climbed to 56, its strongest reading in 53 months, from 55.9 in September. The result was above the market forecast of 55.6.

Services activity moderated, with the sector's PMI falling from September's 58.8 to 57.9, matching forecasts. Combining manufacturing and services, the Composite PMI also eased, moving from 58.4 to 57.6. Even so, the reading stayed comfortably above 50, the dividing line between expansion and contraction.

Wednesday's monetary policy decision from the Fed is now in focus for investors. Expectations are widespread that the US central bank will hold interest rates within the 3.75%-4.00% range.

December's policy outlook is less clear, however. According to the CME FedWatch Tool, markets assign an approximately 80% probability to a further interest rate increase, with Oil prices a particular source of inflation risk.

Against this backdrop, investors will scrutinise the policy statement and Fed Chair Kevin Warsh's comments at the press conference that follows. With no updated economic projections due, his remarks could offer significant indications of where US interest rates are heading and shape the US Dollar's performance relative to the Australian Dollar.

AUD/USD technical analysis: Can the pair sustain its upward momentum?

A mildly bullish outlook remains intact on the one-hour chart, where AUD/USD is trading at 0.7034 above both the 100-period simple moving average (SMA) of 0.7009 and the 200-period SMA of 0.6985. As the pair edges towards nearby overhead supply, the Relative Strength Index (14), at around 63, signals improving bullish momentum while remaining below overbought territory.

The first upside hurdle lies at 0.7037, followed by horizontal resistance at 0.7045, where buying interest could begin to weaken. Below current levels, the 100-period SMA at 0.7009 offers immediate support. Further support lies at the horizontal level of 0.6994, ahead of deeper structural support near the 200-period SMA at 0.6985.

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