Surging US bond yields: Australian Dollar falls further against US Dollar

• Higher US bond yields weigh on riskier currencies, extending the Australian Dollar’s decline.
• Rate increases at the December, January and March Fed policy meetings are now expected by TD Securities.
• The RBA’s monetary tightening cycle appears to have reached its end.

The Australian Dollar (AUD) is down 0.15% against the US Dollar (USD). Trading near 0.6795 in Friday’s European session, the pair extends its run of losses. A surge in United States (US) Treasury yields has reduced demand for riskier assets, including the Australian Dollar, leaving the Aussie under pressure.

Nearly 5.5% has been added to 10-year US bond yields over the past two trading days. At the time of writing, the 10-year US Treasury yield remains close to a three-week high near $5.13%.

US inflation drives Treasury yield surge

The latest US inflation report was the main catalyst for the jump in Treasury yields, according to Deutsche Bank strategists. They note that “the monthly core CPI print for October was above consensus at +0.30% (vs. +0.2% expected).” The strategists emphasise that “it was the third consecutive month with core CPI at +0.3%, and if you take those three months together, the annualised pace for core CPI is running at +3.75%.” In Deutsche Bank’s assessment, “that’s the fastest pace on that measure since April 2024, so it made it increasingly difficult to dismiss this as a blip.”

With US inflation at risk of remaining elevated, market experts have been compelled to revisit their expectations for Federal Reserve (Fed) interest rate increases.

A more hawkish near-term policy outlook has been adopted by TD Securities, its strategists say. The firm now anticipates "25bp hikes in December, January, and March," replacing its previous forecast for increases in December and March only.

The Australian Dollar also faces pressure from market expectations that the Reserve Bank of Australia’s (RBA) interest rate cycle is over.

RBA tightening limits erode AUD support

Earlier support for the Aussie is fading, according to MUFG analysts. They acknowledge that the “pre-emptive nature of monetary tightening in Australia has benefitted the Australian Dollar,” but now believe that “time appears to have run out for providing support for the currency”. Investors increasingly see the RBA as “running out of scope for additional rate hikes at a time when investors are reappraising their views on additional Fed rate hikes.” To illustrate how front-loaded this cycle has been, the analysts point out that the RBA has already “hiked on five occasions this year and the policy rate at 4.85% is the highest since 2008 when the RBA was cutting rates into the Global Financial Crisis,”. Following that pre-emptive tightening, “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,”. This reinforces the assessment that domestic rate support for the Aussie is largely spent, just as expectations for US rates are moving higher.

Attention now turns to Tuesday’s release of the minutes from the RBA’s October policy meeting.

AUD/USD Technical Outlook: 0.6930 Caps Recovery

At 0.6795 on the daily chart, AUD/USD continues to retreat below its 20-day exponential moving average (EMA) of 0.6930. That average provides immediate overhead resistance, maintaining a bearish near-term outlook. Failure to recover above the EMA indicates that rallies are likely to attract selling. Meanwhile, the Relative Strength Index (14) stands at 31.8, just outside oversold territory. The reading points to continued downward pressure, with only a modest risk of a corrective rebound.

A daily close above the 20-day EMA near 0.6930, the first resistance level, would be required to soften the bearish outlook and allow a more sustained recovery. Below the market, the current dataset provides no clear technical support levels. Traders may therefore consider previous price lows and psychological levels below 0.6800 as possible demand zones. However, the prevailing price structure leaves those supports exposed for as long as the pair remains below the EMA.

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