The Australian Dollar (AUD) surged significantly against the US Dollar (USD) on Thursday, driven by positive economic data from Australia and the Reserve Bank of Australia’s (RBA) firm stance on inflation. The AUD/USD pair rose by 0.90% to 0.6890, regaining momentum after a slight dip earlier in the week. This sharp move highlights the continued divergence between Australian and US monetary policies, with the RBA taking a more hawkish approach compared to the market's anticipation of further rate cuts by the US Federal Reserve (Fed).
The RBA’s decision to hold its benchmark interest rate steady at 4.35%, while delivering a strong message against any near-term rate cuts, has provided a significant boost to the Australian Dollar. This decision came amidst a backdrop of improving economic indicators in Australia, particularly in the labor market and consumer spending. In contrast, the US Dollar has been under pressure as markets increasingly expect the Fed to deliver a larger-than-expected 50 basis point (bps) rate cut in November.
RBA’s Hawkish Stance Supports the Australian Dollar
One of the key drivers behind the Australian Dollar’s strength has been the RBA’s hawkish tone on inflation. Despite keeping rates unchanged at 4.35%, RBA Governor Michelle Bullock reiterated that the central bank remains committed to containing inflation, and that any discussion of rate cuts is premature. This assertive stance contrasts sharply with other central banks that have already started cutting rates, or are expected to do so in the near future.
Governor Bullock’s remarks echoed the RBA’s concern that inflation remains stubbornly above target, and that aggressive action might still be required to bring it under control. This rhetoric sent a strong signal to investors that Australia’s central bank is not ready to ease its monetary policy, providing a tailwind for the Aussie Dollar.
The RBA’s decision also follows a series of positive economic data points from Australia. Employment figures have remained strong, with the unemployment rate holding steady at 3.6%, while consumer spending has shown resilience despite higher borrowing costs. This strength in domestic data further supports the RBA’s argument for maintaining a restrictive monetary policy stance.
US Dollar Weakness Boosts AUD/USD
While the Australian Dollar gained ground, the US Dollar faced significant weakness, adding further fuel to the AUD/USD rally. The USD has been under pressure due to growing speculation that the Federal Reserve will cut interest rates by 50 basis points at its November meeting. This expectation follows a series of dovish comments from Fed officials, coupled with softer-than-expected US economic data.
The Fed’s dovish tone has been evident in recent speeches by several policymakers, including Fed Governor Adriana Kugler, who hinted at the possibility of aggressive easing measures to support the US economy. This dovish rhetoric has led markets to increasingly price in a 50 bps cut, which would lower US interest rates to a range of 4.75%-5.00%.
Additionally, despite robust data such as stronger-than-expected US New Home Sales and Mortgage Applications, the broader US economic picture remains mixed. Labor market concerns have been highlighted in the Conference Board Consumer Confidence report, which fell sharply in September, reflecting growing pessimism about future economic conditions. This report further cemented expectations of aggressive Fed rate cuts, which weighed on the US Dollar.
As a result, the divergence between the hawkish RBA and the dovish Fed has widened, providing a clear advantage to the Australian Dollar in the AUD/USD pair.
Upcoming US PCE Data in Focus
Looking ahead, investors are closely watching the upcoming release of the United States (US) Personal Consumption Expenditure (PCE) Price Index, which is the Fed’s preferred measure of inflation. The core PCE data, which excludes volatile food and energy prices, is expected to increase from 2.6% in July to 2.7% in August.
A stronger-than-expected PCE print could complicate the Fed’s decision-making process, potentially dampening expectations for a 50 bps rate cut. On the other hand, a weaker reading would reinforce market expectations of aggressive easing and likely lead to further weakness in the US Dollar, providing additional support for the Australian Dollar.
As market participants await the PCE data, they will also be monitoring the final print of the Michigan Consumer Sentiment report and Personal Income and Spending data. These indicators will offer further insights into the health of the US economy and may influence the Fed’s rate path in the coming months.
Technical Analysis: AUD/USD Bullish Momentum Builds
From a technical perspective, the AUD/USD pair has regained bullish momentum after bouncing off key support around the 0.6800 level earlier in the week. The pair now trades near the 0.6900 barrier, which represents a key resistance level.
Indicators such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are both suggesting continued upward momentum for the Aussie. The RSI remains in bullish territory, while the MACD shows strong upward divergence, indicating that the pair could break above the 0.6900 resistance level in the near term.
If the AUD/USD pair manages to clear the 0.6900 resistance, it could pave the way for further gains toward the next resistance levels at 0.6950 and 0.7000. However, if the pair fails to break above 0.6900, a pullback toward the 0.6800 support level is possible. Below that, further support lies at 0.6750 and 0.6730.
Conclusion
The Australian Dollar’s recent surge against the US Dollar highlights the ongoing divergence between the monetary policies of the Reserve Bank of Australia and the Federal Reserve. While the RBA maintains a hawkish stance on inflation, the Fed is expected to continue easing rates, providing a favorable backdrop for the AUD/USD pair.
As markets await key US economic data, particularly the PCE inflation report, the outlook for the AUD/USD pair remains bullish. A stronger-than-expected PCE reading could temporarily halt the Aussie’s advance, but the overall trend remains positive, supported by robust Australian data and the RBA’s commitment to controlling inflation.
Traders should watch for any developments in US data, as they will likely play a critical role in shaping the direction of the AUD/USD pair in the coming days. If the Aussie manages to break above the 0.6900 level, further gains are expected, while a failure to do so could trigger a short-term correction.
