Fed Rate Cut Bets Weaken Greenback as AUD Rallies on RBA's Cautious Hold Outlook

Strength in the Australian Dollar against the US Dollar is gathering momentum for the fifth consecutive session as traders increasingly factor in expectations that the Reserve Bank of Australia will maintain current rates through December. Meanwhile, the Greenback faces headwinds from surging probability of a Federal Reserve interest rate reduction within weeks.

What’s Driving the AUD Rally?

The currency pair AUD/USD broke higher on Thursday as several positive indicators reinforced the case for RBA stability. The Australian Bureau of Statistics delivered Private Capital Expenditure data showing a robust 6.4% quarter-over-quarter acceleration in Q3—a sharp jump from the prior quarter’s modest 0.2% gain and comfortably beating the 0.5% forecast.

The momentum was further supported by October’s monthly Consumer Price Index release, which came in at 3.8% year-over-year, exceeding both the 3.6% consensus expectation and the prior reading of 3.5%. This hotter-than-anticipated inflation print, while above the RBA’s 2–3% target band, solidified market conviction that the central bank would hold the Official Cash Rate steady at 3.6%.

Futures markets reflected this conviction clearly. The ASX 30-Day Interbank Cash Rate Futures contract for December 2025 was priced at 96.41 as of late November, indicating merely a 6% probability of an RBA rate cut to 3.35%.

Adding to the supportive narrative, Australia’s manufacturing and services sectors showed resilience. The S&P Global Manufacturing PMI climbed to 51.6 in November from 49.7, signaling expansion after contraction, while the Services PMI ticked up to 52.7 from 52.5. The Composite PMI reached 52.6 versus 52.1 previously, painting a picture of modest but steady economic activity.

US Dollar Under Pressure from Fed Cut Expectations

The American currency has surrendered ground as market participants dramatically repriced the likelihood of near-term Federal Reserve accommodation. The CME FedWatch Tool now shows traders assigning an 84% probability to a 25 basis-point rate cut in December—a dramatic swing from just 30% probability one week prior.

This hawkish shift stems from multiple signals. Fed Governor Christopher Waller stressed that the weakening labour market represents his chief concern, calling inflation “not a big problem” in light of recent employment softness. New York Federal Reserve President John Williams indicated that rate reductions could still occur in the “near term,” while Governor Stephen Miran explicitly stated he would support a 25 basis-point cut if his vote were decisive.

Separately, reports of Kevin Hassett emerging as the leading candidate for the next Fed chair added fuel to cut expectations, as markets perceive him as aligned with the Trump administration’s preference for lower borrowing costs.

Recent economic data added nuance to the picture. Initial Jobless Claims declined to 216,000 for the week ending November 22, beating expectations of 225,000 and suggesting labour market softness. The Producer Price Index held steady at 2.7% year-over-year in September, meeting forecasts, while Core PPI eased to 2.6% from 2.9%, undercutting the 2.7% estimate.

Consumer spending showed signs of caution, with Retail Sales climbing just 0.2% month-over-month in September—a significant deceleration from August’s 0.6% gain. Consumer Confidence deteriorated sharply, sliding 6.8 points to 88.7 in November from October’s 95.5.

Technical Picture: AUD/USD Breaking Key Resistance

From a technical standpoint, the AUD/USD pair has decisively moved above its nine-day Exponential Moving Average, suggesting strengthening momentum in the near term. The pair was trading near 0.6530 on Thursday, having moved into a rectangular consolidation zone that traders are now watching closely.

The upper boundary of this consolidation sits around 0.6630, and breaking through that level would suggest further upside potential. For perspective on currency movements, consider that when converting substantial amounts—such as 3.5 million yen to USD—even small percentage moves in major pairs like AUD/USD can have material implications for international transactions.

On the downside, initial support emerges at the psychological 0.6500 level, coinciding with the nine-day EMA positioned near 0.6495. Should sellers breach this confluence zone, the pair could retreat toward the rectangle’s lower boundary near 0.6420, with the five-month low of 0.6414 (set on August 21) representing a critical floor.

The Broader Currency Landscape

Across the forex complex, the Australian Dollar emerged as the clear outperformer, gaining 0.33% against the US Dollar on the day. Strength was more muted relative to other major currencies, with the AUD moving 0.02% versus the Euro and essentially flat against Sterling.

The US Dollar Index, which tracks the Greenback against six major currencies, has retreated to approximately 99.50, weighed down by the shift in Fed expectations and signs of labour market weakness.

What Lies Ahead?

The key inflection point for AUD/USD appears to centre on whether the Fed indeed delivers a December rate cut. Each day brings fresh commentary from Fed officials, and any dovish surprise could trigger another leg lower for USD. Conversely, should employment data stabilize or the Fed strike a more cautious tone, the Greenback could stabilize and cap AUD appreciation.

For Australian assets, the RBA’s demonstrated willingness to hold rates through an extended period—while monitoring labour market dynamics—should continue supporting the currency in the near term, particularly if US monetary policy shifts toward accommodation.