Australian dollar faces downward pressure as rate cut bets mount

Daily Currency Update

Overnight, the Australian dollar (AUD) endured a volatile trading session, reflecting broader market uncertainty and shifting sentiment around global monetary policy. The currency initially fell sharply, dropping more than 1% against the US dollar, after stronger-than-expected U.S. economic data and increasingly hawkish commentary from the Federal Reserve boosted demand for the greenback.

This reaction highlighted investors' ongoing sensitivity to interest rate expectations, particularly given the Fed’s firm stance on maintaining elevated rates to combat inflation. However, as the session progressed, the AUD recovered much of its earlier losses, supported by profit-taking on US dollar positions and possibly improved regional risk sentiment or commodity-related flows.

By early Asian trading this morning, the AUD was slightly higher at around US$0.6443, marking a modest 0.13% gain for the session. The currency’s performance reinforces the significant influence of external drivers, especially from the U.S. on its short-term direction.

Looking ahead, the outlook for the AUD remains cautiously bearish. Domestic factors such as softening inflation, weaker economic growth, and growing expectations of additional rate cuts by the Reserve Bank of Australia (RBA) are weighing on sentiment. With Q2 inflation falling within the RBA’s 2–3% target band, markets are increasingly anticipating multiple rate cuts over the coming months.

Externally, continued US dollar strength, Fed hawkishness, and weakening Chinese demand for Australian exports are adding further pressure. While the AUD may find short-term support near US$0.64, persistent headwinds and narrowing rate differentials suggest limited upside. Still, a modest rebound toward US$0.65–0.67 remains possible by late 2025, should U.S. inflation ease, global risk appetite improve, and Australia’s economic indicators begin to stabilise.