Expectations that the RBA would resume its rate-hiking cycle, combined with the Australian dollar’s status as a commodity currency, had allowed the aussie to steadily strengthen. However, Kevin Warsh’s hawkish speech at Jackson Hole turned the outlook on its head. Let’s analyze the situation and develop a trading plan for the AUD/USD pair.
The article covers the following subjects:
Major Takeaways
- A cash rate hike is expected in September or November.
- The Fed’s intention to raise rates triggered a decline in the AUD/USD pair.
- The aussie rose due to its status as a commodity currency.
- Short positions on the AUD/USD can be opened below 0.715.
Weekly Fundamental Forecast for Australian Dollar
Kevin Warsh’s hawkish rhetoric shocked AUD/USD bulls. After the Fed chair said monetary policy was not sufficiently restrictive, derivatives markets revived expectations of two federal funds rate hikes. Before Warsh’s remarks, the Australian dollar had strengthened by 5% against its US counterpart from its June lows and was considered the most overvalued G10 currency.
Deviations of G10 Currencies from Averages
Source: Bloomberg.
Overvaluation and the derivatives market’s expectations that the RBA will raise its cash rate underpin the bearish outlook for AUD/USD quotes. According to SB1 Markets, the pair is expected to fall 3.7% by year-end, while Banco Santander and Danske Bank expect the price to hit 0.700 by the end of December and early December, respectively. The banks believe that investors’ expectations regarding the timing and scale of the RBA’s monetary tightening are overstated.
As a result, derivatives markets raised the probability of an RBA rate hike in November from 48% to nearly 100% following the release of stronger-than-expected inflation data and the minutes from the RBA’s latest meeting. Australia’s trimmed mean inflation held steady at 3.6% year-over-year in July, exceeding Bloomberg forecasts, while the monthly core measure accelerated from 0.3% to 0.5%. At the same time, consumer spending accelerated to 1.1% month-over-month—three times higher than expected—and reached 7% year-over-year. Together, these figures point to a resilient Australian economy but also highlight growing risks of renewed inflationary pressures.
Market Expectations for RBA Policy Rate
Source: Bloomberg.
This is a situation the Reserve Bank of Australia is unlikely to tolerate. The meeting minutes revealed that the RBA is seriously concerned about inflation. Its decision to keep the benchmark rate at 4.35% was based on the expectation that the disinflationary trend would resume. However, forecasts showing CPI remaining above the upper end of the 2–3% target range through 2027 suggest otherwise. As a result, CBA, ANZ, and Goldman Sachs expect the cash rate to rise in November, with some risk of a hike as early as September.
In fact, the derivatives market’s reassessment of the federal funds rate outlook following Kevin Warsh’s hawkish remarks at Jackson Hole has deprived the AUD/USD bulls of their main advantage.
SB1 Markets rightly notes that the aussie’s outlook will depend not only on monetary policy but also on developments in the Middle East conflict. The oil rally is supporting commodity currencies, meaning that an escalation of geopolitical tensions—such as the resumption of US airstrikes against Iran—could work in the aussie’s favor.
Weekly AUDUSD Trading Plan
The market has been selling the US dollar for too long, expecting the Fed to leave interest rates unchanged. As these long positions are unwound, the AUD/USD pair could come under pressure. If the price slides below the 0.715 support level, short trades can be considered. However, geopolitical factors could limit the aussie’s decline.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of AUDUSD in real time mode
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