The Australian Dollar (AUD) strengthened against the US Dollar (USD) on Wednesday, advancing 0.40% to trade around 0.6510 as comments from Reserve Bank of Australia (RBA) officials highlighted persistent inflation concerns while dovish signals from the Federal Reserve (Fed) continued to pressure the Greenback.
RBA warns of lingering inflation pressures
Speaking at the Citi Australia & New Zealand Investment Conference in Sydney, RBA Assistant Governor Sarah Hunter warned that inflation risks remain tilted to the upside. She noted that “inflation is likely to be stronger than expected in the third quarter, while labor market and economic conditions might be tighter than assumed.” Her comments reinforced expectations that the RBA will avoid aggressive rate cuts in the near term, preferring to monitor upcoming inflation and employment data before shifting policy.
Investors now await the third-quarter Consumer Price Index (CPI) report, due later in October, which could provide clearer signals on the trajectory of price pressures and the RBA’s policy stance.
Australian labor market in focus
Attention is turning to Thursday’s September employment data, where consensus forecasts a 17,000 increase in jobs following a 5,400 decline in August. The Unemployment Rate is projected to edge up to 4.3% from 4.2%. Analysts at ING noted that such a modest rise is unlikely to alarm the RBA unless job conditions deteriorate sharply in the coming months.
Fed’s dovish outlook pressures the Greenback
The US Dollar remains under pressure as markets increasingly expect further monetary easing by the Fed. According to the CME FedWatch tool, traders are pricing in a 95.6% probability of two rate cuts totaling 50 basis points before the end of the year, which would bring the target range down to 3.50%–3.75%.
Fed Chair Jerome Powell recently emphasized that the weakening labor market now poses a greater risk than inflation, hinting that additional rate cuts could come as early as the October meeting. Fed Governor Michelle Bowman echoed this view, stating she anticipates “two more rate cuts before the end of this year.”
Trade tensions remain a headwind for AUD
While the broader risk-on mood and USD weakness have supported the Australian Dollar, ongoing US-China trade tensions continue to cap upside momentum. Australia’s heavy trade exposure to China makes the currency sensitive to any escalation in tariffs or restrictions between the two economies.
In the near term, AUD/USD’s direction will hinge on Thursday’s employment report and the evolution of US-China trade relations, with stronger domestic data likely to reinforce the RBA’s cautious stance and extend support for the Aussie.
