Australian Dollar trades cautiously as Fed and RBA rate hike bets clash

The Australian Dollar (AUD) traded cautiously on Tuesday as differing expectations from the Federal Reserve (Fed) and the Reserve Bank of Australia (RBA) kept the pair in a range. Soft US economic data failed to spark significant selling pressure on the US Dollar (USD), allowing the AUD to remain close to its highest level in over a month at 0.7206.

The ISM Manufacturing Purchasing Managers Index (PMI) fell to 54.6 in August, below expectations of 55.2, while the ISM Prices Paid Index held steady at 71.1. The Greenback weakened briefly after the releases before recovering slightly. The US Dollar Index (DXY) rose 0.23% to 99.64. Traders see a 66% chance of a rate hike from the Fed in the upcoming September meeting.

Surging oil prices due to Middle East tensions add to inflation risks, complicating the Fed's efforts to bring inflation back to its 2% target and intensifying price pressures in Australia. Inflation remains a concern for the Australian economy, prompting the RBA to raise rates three times this year. China's manufacturing PMI rose to 51.5 in August, providing some support to the Australian Dollar. The focus now shifts to Australia's second-quarter GDP data, due on Wednesday.