The Australian dollar under pressure: The Fed's rate cut expectations shift significantly

Last week, the Federal Reserve officials’ remarks shifted, and the market’s enthusiasm for a December rate cut cooled sharply. This adjustment directly hit the Australian dollar, causing AUD/USD to fall to around 0.6520 on Monday. The core issue is— the probability of a Fed rate cut dropped from 67% a week ago to 46%, removing the relative weakness of the US dollar as support for the Australian dollar, which naturally had to concede.

The Fed’s stance has hardened, and the Australian dollar is suffering

The immediate driver of this round of AUD weakness is the rebound of the US Dollar Index (DXY) to 99.40. Several “hawkish” Fed officials have recently spoken frequently—Kansas City Fed President Esther George emphasized the need to “resist demand growth,” while St. Louis Fed President James Bullard said rates are approaching a neutral zone. These signals all suggest: a December rate cut? Not so easy.

In contrast, the Reserve Bank of Australia (RBA) appears more dovish. The ASX 30-day interbank cash rate futures show the market only assigns a (from 3.60% to 3.35%)6% probability of a rate cut in December. But this is not enough to support the Australian dollar—after all, the decision-making power over global liquidity still lies with the Fed.

Australian employment data beats expectations but still can’t prevent depreciation

The employment data released last week by the Australian Bureau of Statistics (ABS) was indeed strong. The October unemployment rate fell from 4.5% to 4.3%, better than the market expectation of 4.4%. Employment increased by 42.2K, far exceeding the expected 20K, with full-time employment rising by 55.3K. This data should have provided some support to the AUD, reflecting that the RBA has no urgent reason to cut rates in the short term.

But the reality is—strong employment data has instead reinforced market expectations of Australia’s economic resilience, giving investors more confidence to switch to the dollar. Coupled with China’s October economic data being lukewarm (retail sales only increased by 2.9%, industrial production 4.9%), and the support for commodity prices weakening, the AUD faces a double pressure.

Technical outlook: Looking for breakout opportunities within the rectangle consolidation

AUD/USD is consolidating within a clear rectangular range, with the upper boundary around 0.6630 and the lower boundary around 0.6470. The price is currently hovering near the 9-day moving average (EMA), with momentum stable but weak.

The bullish case is that if it breaks above 0.6630, the AUD could attempt to challenge the 13-month high of 0.6707 set on September 17. However, this requires a significant shift in Fed rate cut expectations, which seems unlikely in the near term.

Conversely, if it falls below the support at 0.6470, the AUD could head toward the five-month low of 0.6414 set on August 21. The current level at 0.6520 is between these two points, representing a “chicken rib” position—upward movement needs new bullish reasons, downward pressure is not urgent.

In the short term, the AUD’s performance largely depends on the Fed’s subsequent remarks and economic data. As long as the Fed maintains a hawkish stance, the AUD will find it difficult to rally.