Australian Dollar holds ground as Fed decision looms

Australian Dollar maintained its position on Wednesday as the Federal Reserve prepared to announce its monetary policy decision. The AUD/USD pair was trading around 0.7134, barely moving from the previous day. The US Dollar Index (DXY) hovered near its two-week high at 99.67. The Fed is expected to raise rates by 25 basis points, bringing the federal funds target range to 3.75%-4.00%, the first increase since July 2023.

Market participants have largely priced in this move, with attention now shifting to the updated Summary of Economic Projections and Federal Reserve Chair Kevin Warsh's post-meeting remarks. Inflation remains the primary concern for policymakers, aiming to return it to the 2% target. However, recent gains in the US Dollar have been driven by elevated oil prices resulting from the Middle East conflict.

The Fed's announcement could signal whether the hike is a one-time response to the energy-driven inflation or indicates further rate increases. A hawkish tone suggesting additional tightening could weaken the Australian Dollar, while a modest rate increase with cautious guidance might strengthen the pair. Despite this, AUD losses are expected to remain limited as the Reserve Bank of Australia (RBA) maintains a hawkish stance, having left the cash rate unchanged at 4.35% in August while signaling a potential increase to 4.60% at its September 29 meeting.