Australian Dollar falls against US Dollar after hawkish Fed rate hike

The Australian Dollar experienced a decline against the US Dollar after the Federal Reserve announced a rate hike and released a hawkish set of policy projections. The AUD/USD currency pair dropped by more than 20 pips, trading around 0.7111 at the time of writing. The Federal Reserve increased the federal funds target range by 25 basis points to 3.75%-4.00%, marking its first rate increase since July 2023. The US Dollar Index gained momentum, nearing the 100.00 psychological mark after the announcement.

The Fed's updated dot plot indicated that 16 out of 18 officials expected at least one more rate hike this year, with four projecting two additional hikes and two expecting no further moves. The median year-end rate projection rose to 4.1% from 3.8% in June, while the 2027 projection increased to 4.1% from 3.6%. The Fed also raised its 2026 GDP growth forecast from 2.2% to 2.3% and boosted the headline PCE inflation projection to 3.7% from 3.6%.

Core PCE inflation forecast climbed to 3.4% from 3.3%, while the Unemployment Rate projection fell to 4.1% from 4.3%.

However, the downside reaction appeared limited as the quarter-point rate hike was largely anticipated by traders. They now await Fed Chairman Kevin Warsh's press conference for more insights into the future policy path. The Australian Dollar maintained its negative bias for the third consecutive day, holding near a monthly low.

The US Dollar stood firm near a two-week high, driven by the expected Fed rate hike and oil-driven inflation concerns. The US bond yields reached multi-year highs, while escalating Middle East tensions bolstered the safe-haven dollar.