The AUD/USD pair loses traction to near 0.7160 during the early Asian session on Monday. The US Dollar (USD) strengthens against the US Dollar (USD) after Federal Reserve (Fed) Chair Kevin Warsh hinted that rate hikes may be needed should policymakers doubt that inflation is headed back toward the central bank’s 2% target.
Warsh said on Friday at the Jackson Hole symposium in his debut speech that the US central bank will “have work to do” should inflation not appear to be cooling, in remarks that acknowledged financial conditions do not appear restrictive and marked the closest he has come to recognizing that interest rate increases may be needed to ease price pressures.
“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” said Warsh. “Otherwise, we have work to do,” he added.
Markets are now pricing in nearly a 57.5% chance of at least 25 basis points (bps) at the Fed’s September meeting, up from 35% before the speech, according to the CME FedWatch tool.
Traders brace for the release of China’s NBS Purchasing Managers Index (PMI) data, which are due later on Monday. If the reports show stronger-than-expected outcomes, this could help limit the Aussie’s losses, as China is a major trading partner to Australia.
Warsh flags unfinished inflation fight, keeps Dollar bulls alert
Fed Chair Warsh delivered a clearly hawkish-leaning message, with the FXS Speechtracker score of 7.4/10 signaling a stronger-than-usual emphasis on price stability compared to the established baseline of 6.5/10. The insistence that the Fed must be confident underlying inflation is moving to target or “we have work to do,” combined with comments that financial conditions are not truly restrictive and credit markets show few signs of restraint, underscores a bias toward keeping policy tight and leaves the door open to further tightening if inflation progress stalls. Warsh’s focus on the firmness of the 2% PCE target, the primacy of prices over growth, and skepticism that recent softer inflation prints mark a durable trend is supportive of the Dollar and broadly negative for risk-sensitive assets.
The FXS Fed Sentiment Index was unchanged on the day, holding at 129.70, which keeps the overall stance firmly in hawkish territory despite no incremental shift in the aggregate signal. This flat reading, alongside the above-baseline FXS Speechtracker score, suggests markets already priced a restrictive Fed path, but Warsh’s remarks help anchor expectations that policy will remain tight until inflation convincingly converges to target.
Aussie advance slows as UOB flags fading momentum near 0.7200
Analysts at UOB Group note that the recent AUD/USD upswing is beginning to lose some steam as key resistance levels come into view. They recall that last Thursday, with the pair trading around 0.7125, they had highlighted that “while further AUD strength is not ruled out, it must first break clearly above 0.7150 before a move to 0.7175 can be expected.” After the Aussie “broke clearly above 0.7150,” UOB reiterated on Monday, when spot was near 0.7165, that “AUD strength remains intact, and the level to watch is 0.7200.” The pair subsequently climbed to a high of “0.7198” yesterday, but UOB warns that “upward momentum is deteriorating amid negative divergence on momentum indicators.” Even so, they judge that “as long as AUD holds above 0.7160 (‘strong support’ level previously at 0.7120), there is a chance for AUD to test 0.7220 before the risk of a pullback increases.”
Technical Analysis: AUD/USD keeps a bullish vibe in near term
In the daily chart, AUD/USD holds a constructive bullish bias as spot remains above the 100-day simple moving average (SMA) and the Bollinger middle band, suggesting underlying demand on shallow pullbacks. Price is edging toward the upper Bollinger band while the 14-period Relative Strength Index (RSI) around 62.7 stays in positive territory without yet signalling overbought conditions, hinting that upside momentum is firm but not overstretched.
On the topside, immediate resistance is located at the upper Bollinger band around 0.7205, where a clear break would open the way for an extension of the current advance. On the downside, initial support is seen at the Bollinger middle band near 0.7105, followed by the 100-day SMA around 0.7078 and then the lower Bollinger band close to 0.7005, levels that collectively define a broad demand zone underpinning the bullish outlook as long as they hold.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
