AUD Hits Weekly Low as Rate Hike Bets Fade, Overriding USD Weakness

The Australian Dollar is trading at a fresh weekly low. The catalyst is a repricing of Reserve Bank of Australia rate hike expectations that is overriding the typical support from a softer US dollar.

RBA Policy Repricing Drives the Move

Markets have reduced the probability of another rate increase after recent data showed softer domestic inflation and a cooling labor market. The RBA held the cash rate at 4.35% at its last meeting, and the accompanying statement struck a more cautious tone on the outlook for price pressures.

Lower rate hike expectations compress the yield advantage that the Australian Dollar offers over other currencies. When the RBA is seen as less likely to tighten, short-term Australian bond yields fall relative to US Treasury yields. That reduces the carry appeal of long AUD positions. This dynamic is the primary driver of the current weakness.

USD Weakness Fails to Lift the Aussie

A softer US dollar usually provides a tailwind for the Australian Dollar. The DXY index has edged lower this week as US economic data came in mixed, prompting a modest pullback in Federal Reserve rate hike expectations. That support is not materializing for the Aussie.

The reason lies in the relative policy outlook. While the Fed is also expected to hold rates steady, the market still sees a higher terminal rate for the US compared to Australia. The narrowing of the rate differential works against the Australian Dollar even when the greenback weakens on an index basis. This is a classic example of a currency pair moving on relative monetary policy expectations rather than absolute dollar strength.

For traders tracking the EUR/USD pair, the same dynamic plays out in different form. The euro has gained against the dollar this week. The Australian Dollar has not followed because its own central bank outlook is less supportive. The divergence highlights why a softer dollar alone does not lift all risk-sensitive currencies.

For a broader view of how central bank expectations drive currency markets, see our forex market analysis. The EUR/USD profile also offers a useful comparison for understanding how rate differentials affect major pairs.

RBA Minutes and CPI Data as Decision Points

The next scheduled catalyst for the Australian Dollar is the release of the RBA’s meeting minutes from the last policy meeting. The minutes will provide more detail on the board’s thinking around inflation risks and the labor market. A more dovish tilt than the statement suggested could extend the AUD decline. A hawkish minority pushing for a hike could provide a floor.

Beyond the minutes, the key data point is the monthly CPI indicator due next week. A downside surprise would further reduce rate hike bets and push the Australian Dollar lower. An upside print would force a reassessment, potentially triggering a short-covering rally.

The Australian Dollar’s near-term path depends on whether the RBA can maintain a hawkish stance relative to other central banks. Currently, the market is betting it cannot.