Australian Dollar gains as US Dollar struggles amid fading Fed rate hike bets

The Australian Dollar has been on an upward trend for three consecutive days, trading close to 0.7110 during Asian market hours on Tuesday. This positive movement comes as the US Dollar (USD) shows signs of weakening due to reduced expectations of further interest rate increases by the Federal Reserve (Fed). An unexpected drop in US Nonfarm Payrolls in July, coupled with a slight rise in consumer price inflation last week, has significantly lowered the probability of a Fed rate hike in the upcoming meeting.

The CME FedWatch Tool now indicates a 35% chance of a rate hike, down from 47% a month ago. Geopolitical tensions between the US and Iran are also affecting market conditions following recent statements from both nations. US President Donald Trump has indicated no willingness to renew the agreement with Iran, citing the ongoing naval blockade and asserting his desire to declare the waterway as US territory.

In contrast, the Iranian Foreign Ministry spokesman insists an agreement is unattainable due to security issues and the obstructionist behavior of certain parties. In Australia, the focus is shifting towards upcoming economic data releases that could impact market sentiment. The Westpac Consumer Confidence Index for August and the second-quarter Wage Price Index are among the key figures to watch.

Economists at Brown Brothers Harriman believe these labor market releases are unlikely to significantly alter the RBA's rate policy stance. They also predict that Australian wages will grow by 0.8% quarter-on-quarter, matching the previous quarter's expansion. Brown Brothers Harriman's analysts argue that this wage growth profile, combined with the expected labor force survey, is not likely to shift the Reserve Bank of Australia (RBA) rate decision.

BBH estimates that "RBA cash rate futures imply a 60% chance of a final 25bps hike by year-end to 4.60%." However, they caution that the current scenario leans more towards a prolonged pause in the RBA's tightening cycle, as the central bank has already adopted a restrictive stance. AUD/USD is currently trading at 0.7110, maintaining a bullish outlook as it stays above both the nine-period and 50-period Exponential Moving Averages (EMAs).

The short-term EMA is above the longer one, indicating a positive near-term trend, while the 14-day Relative Strength Index (RSI) at 65.84 edges closer to overbought territory, suggesting strong momentum but potential overvaluation. The immediate support level for AUD/USD is observed at the nine-period EMA near 0.7074, which lies above the 50-period EMA at 0.7028.

If buyers can hold onto these support levels, the AUD/USD pair is expected to remain on an upward path. However, the high RSI reading warns that any further gains from 0.7110 might result in consolidation rather than a sustained rise.