The Australian Dollar (AUD) edged lower on Thursday despite stronger Consumer Inflation Expectations, which rose to 4.7% in September from August’s five-month low of 3.9%. The modest pullback comes after the AUD/USD pair recorded gains in the previous session, highlighting a mixed market sentiment.
While domestic inflation pressures have increased, support for the AUD remains underpinned by expectations that the Reserve Bank of Australia (RBA) will maintain its monetary policy stance at the upcoming September meeting. The Arbitics team simplifies the subject with clear insights and a detailed explanation.
AUD Supported by RBA Policy Outlook
Swaps markets currently assign an 86% probability that the RBA will leave interest rates unchanged in September. This reflects solid recent Australian economic data, which has dampened expectations of further RBA rate cuts. RBA Governor Michele Bullock emphasized that the private sector is experiencing “a little bit more growth,” a positive sign for the Australian economy, but one that also suggests inflationary pressures may persist.
The increase in Consumer Inflation Expectations to 4.7% indicates a rebound in domestic demand and raises concerns over potential renewed inflation pressures. Traders are closely monitoring these developments as they weigh the AUD’s medium-term outlook.
US Dollar Faces Pressure Amid Softer PPI Data
While the AUD pulled back, the US Dollar (USD) faces potential weakness. Softer-than-expected US Producer Price Index (PPI) data for August has reignited speculation about a Federal Reserve (Fed) easing in September.
The headline PPI came in at 2.6% YoY, below July’s 3.3% and the market consensus of 3.3%. Every month, the PPI declined 0.1% in August, underperforming estimates of a 0.7% increase.
Markets are pricing in a 25-basis-point (bps) rate cut for the Fed’s September meeting, with roughly a 12% chance of a larger 50 bps reduction, according to the CME FedWatch tool.
Investors are also closely watching the August US Consumer Price Index (CPI) data, forecasted to rise 2.9% YoY for headline inflation and 3.1% YoY for core CPI. Softer data could strengthen expectations for Fed easing, supporting the AUD against the USD.
US Labor Market and Fed Commentary
Recent US labor market data also point to softer conditions. Preliminary Nonfarm Payroll (NFP) revisions suggest March 2025 employment may be adjusted downward by 911,000, signaling weaker labor market dynamics.
Chicago Fed President Austan Goolsbee expressed uncertainty about the timing of an interest rate cut, citing high inflation concerns and mixed signals from labor data. These developments add complexity to the USD outlook, providing potential opportunities for the AUD to regain strength.
China Economic Developments Impact AUD
Global factors, particularly China’s Consumer Price Index (CPI), also influence AUD dynamics. August CPI fell 0.4% YoY, after remaining flat in July, slightly below market expectations of a 0.2% decline.
Given China’s role as Australia’s key trading partner, slower Chinese inflation and economic growth can impact AUD sentiment, adding a layer of uncertainty.
Australian Consumer Confidence and Future RBA Policy
Domestic factors also shape the AUD outlook. Westpac Consumer Confidence fell to 95.4 in September from 98.5 in August, suggesting a sluggish consumer recovery.
Matthew Hassan, Head of Australian Macro-Forecasting, indicated further RBA easing may be necessary, projecting a 25-basis-point cut in November, followed by two additional reductions in 2026. Traders are thus balancing current support from RBA policy stability against potential medium-term downside pressures.
Technical Analysis: AUD/USD Levels to Watch
From a technical perspective, the AUD/USD pair is trading around 0.6620, maintaining its position within an ascending channel, signaling a persistent bullish bias. The pair remains above the nine-day Exponential Moving Average (EMA), reflecting short-term positive momentum.
Resistance levels are concentrated near the 10-month high of 0.6635, followed by the channel’s upper boundary at 0.6650. A breakout above this zone could drive the AUD/USD toward the 11-month high of 0.6687, recorded in November 2024.
Support levels are aligned with the nine-day EMA at 0.6572 and the lower boundary of the ascending channel near 0.6560. A break below this zone could expose the 50-day EMA at 0.6517, and further declines might test the three-month low of 0.6414, recorded on August 21.
Outlook
The AUD outlook remains nuanced. Short-term gains are supported by RBA policy expectations, technical strength, and potential USD softness amid Fed easing speculation.
Conversely, domestic inflation pressures, sluggish consumer confidence, and global economic uncertainties, particularly from China, may limit the AUD’s upside. Traders are advised to monitor inflation metrics, RBA commentary, and US CPI/PPI data, as these will shape the AUD/USD trajectory in the coming weeks.
