Aussie Dollar Slips Toward Weekly Loss as Fed Stays Cautious
The Australian Dollar (AUD) remains under heavy pressure against the US Dollar (USD) on Friday, with AUD/USD extending losses for a third consecutive session. The pair is poised for its first weekly decline in four weeks, highlighting how the post-Federal Reserve (Fed) rebound in the Greenback has undermined demand for the risk-sensitive Aussie. In this article, Mary Gilbert from LFtrade thoroughly examines the key aspects of the topic.
At the time of writing, AUD/USD trades near 0.6597, close to its lowest level in nearly two weeks. This marks a significant reversal from Wednesday’s high, when the pair briefly touched levels not seen since October 2024 following the Fed’s latest monetary policy decision.
Fed Decision: A Dovish Cut with a Hawkish Tone
The US central bank delivered a 25 basis-point (bps) rate cut, lowering the federal funds rate to the 4.00%–4.25% range. While markets had largely priced in this outcome, the key driver of sentiment was Fed Chair Jerome Powell’s press conference.
Powell described the move as a “risk-management cut”, designed to cushion the economy amid a softening labor market. However, he stressed that policy adjustments are not on a preset course and reiterated that the Fed remains data-dependent.
This cautious communication disappointed investors expecting a more dovish pivot, sparking a rally in US Treasury yields and the US Dollar Index (DXY). As a result, the Australian Dollar lost momentum, reversing gains accumulated earlier in the week.
Diverging Views Inside the Federal Reserve
Adding complexity to the outlook, Fed Governor Stephen Miran, newly appointed, revealed that he was the “bottom dot” in the central bank’s latest Summary of Economic Projections (SEP). His stance underscores divergence within the FOMC regarding the pace of easing.
Miran argued for deeper cuts, even suggesting that a 50 bps reduction would be both justified and manageable for financial markets. He warned that keeping monetary policy restrictive for too long risks harming the labor market and broader economic momentum.
The contrast between Powell’s cautious stance and Miran’s more aggressive outlook introduces policy uncertainty, which in turn reinforces volatility across currency markets. For the Australian Dollar, this dynamic has tilted risk sentiment in favor of the US Dollar’s recovery.
Domestic Data Adds to AUD Weakness
Beyond global monetary policy, domestic labor market figures in Australia have compounded the Aussie’s decline. Thursday’s report showed a 5.4K drop in Employment Change for August, far below consensus expectations of a 22K increase.
The details revealed a sharp 40.9K fall in full-time employment, partly offset by a 35.5K rise in part-time jobs. Meanwhile, the participation rate slipped to 66.8% from 67.0%, while the unemployment rate held steady at 4.2%.
These figures signal underlying fragility in the labor market, undermining the outlook for domestic consumption and potentially restraining the Reserve Bank of Australia (RBA) from pursuing further tightening. With the Fed dampening global risk appetite and the RBA facing local headwinds, the AUD remains vulnerable.
Risk Sentiment and Market Positioning
The Australian Dollar is often regarded as a proxy for risk appetite, given Australia’s close trade links with China and its exposure to global commodity demand. When US Dollar strength emerges from rising Treasury yields or a hawkish Fed tone, the Aussie typically struggles.
Recent price action shows that AUD/USD has broken below short-term moving averages, with technical indicators pointing toward bearish momentum. Traders are closely monitoring the 0.6550–0.6570 support zone, which could act as a near-term floor. A decisive break below may open the door toward 0.6500 psychological support.
On the upside, resistance is seen at 0.6640, followed by 0.6680, levels that capped rallies earlier this week. Sustained recovery would likely require a combination of softer US economic data and signs of stabilization in Australia’s labor market.
Fed Outlook and Its Implications
Looking ahead, the Fed’s cautious stance means markets will remain highly sensitive to incoming data, especially on inflation and employment. Powell’s message that the Fed is “not on a preset course” reinforces the case for flexibility, leaving traders uncertain about the pace of future easing.
At the same time, internal divergence within the Fed, illustrated by Miran’s push for more aggressive cuts, suggests that policy debates will intensify. This uncertainty could translate into choppier moves in USD pairs, with AUD/USD especially exposed given its dual reliance on both global risk sentiment and domestic fundamentals.
Conclusion: AUD Faces a Challenging Path
The Australian Dollar is heading for its first weekly decline in a month, pressured by a resurgent US Dollar and soft Australian employment data. While the Fed delivered the expected 25 bps rate cut, Powell’s emphasis on caution and data-dependence shifted momentum back to the Greenback.
