Australian Dollar rises as RBA rate hike odds increase
- AUD gains as strong July inflation data bolster Reserve Bank of Australia rate hike bets.
- Markets now price in a November rate increase, with major banks forecasting earlier tightening.
- Traders await Federal Reserve Chair Kevin Warsh's Jackson Hole speech for directional hints on US interest rates.
AUD/USD continues its winning streak for the fourth successive day, trading around 0.7200 during the Asian hours on Friday. The currency pair is appreciating as the Australian Dollar (AUD) receives strong support from rising Reserve Bank of Australia (RBA) rate hike bets. This tighter policy outlook follows a hotter-than-expected July inflation report.
Several major banks have revised their cash rate forecasts. National Australia Bank (NAB) now expects the cash rate to reach 4.6% next month, while Commonwealth Bank of Australia (CBA) and ANZ anticipate a move in November, though they acknowledge the possibility of earlier tightening. Financial markets have adjusted accordingly, pricing in roughly a 50% chance of a rate increase at the RBA's September meeting, up sharply from 17% previously, while fully pricing in a November hike.
Societe Generale sees EM FX and Aussie supported by capped US yields
Strategists at Societe Generale argue that the broader FX backdrop continues to favour higher-yielding currencies, so long as US policy keeps bond markets in check. They contend that “as for the bigger picture, as long as the US is trying to keep a lid on Treasury yields, and as long as US growth is holding up, there will be better FX longs in EM than in DM, and continued demand for G10’s highest-yielding currency, the AUD.”
Meanwhile, forex traders are turning their focus to the annual economic symposium in Jackson Hole, Wyoming. Market participants are closely monitoring an upcoming speech by Federal Reserve Chairman Kevin Warsh, searching for potential signals regarding the direction of US monetary policy and interest rates.
Technical Analysis: AUD/USD rises to overbought territory
In the daily chart, AUD/USD trades at 0.7200. The pair retains a bullish near-term bias as price holds comfortably above both the nine- and 50-day Exponential Moving Averages (EMAs), keeping the short- and medium-term trend profiles aligned to the upside. The 14-day Relative Strength Index (RSI) at 70.7 has pushed into overbought territory, suggesting strong but potentially stretched upside momentum after the latest advance.
On the downside, initial support is located at the nine-day EMA around 0.7160, followed by the 50-day EMA near 0.7070, where a deeper pullback would be expected to attract dip-buying interest while the broader uptrend remains intact. Below these dynamic floors, more distant horizontal supports sit at 0.6688, ahead of 0.6434 and 0.6348, levels that define the lower boundary of the broader bullish structure and are unlikely to be challenged unless sentiment deteriorates materially.
(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.