Australian Dollar reverses gains as hot US inflation boosts US Dollar

On Wednesday, the Australian Dollar (AUD) reversed its recent gains and fell by 0.34%, trading around 0.6960 against the US Dollar (USD). This decline occurred as stronger-than-anticipated US inflation data prompted a surge in the US Dollar, intensifying pressure on the AUD. The US Consumer Price Index (CPI) released on Wednesday showed annual inflation rising to 3.7% in September, surpassing the previous 3.4% and exceeding market expectations.

Despite the core CPI remaining relatively stable at 2.6% compared to the 2.4% recorded earlier, the upward movement in headline inflation highlighted persistent price pressures in the US economy. This reinforced predictions that the Federal Reserve (Fed) might maintain a tight monetary policy or even increase interest rates further to curb inflation.

Consequently, markets increased the probability of a 25-basis-point (bps) Fed rate hike in October to 47%, up from 22% the previous day, and a 41% chance of a rate hike in December, up from 18%. This shift in Fed interest rate expectations bolstered the US Treasury yields, further bolstering the Greenback. The benchmark 10-year US Treasury yield increased to around 5.33%, up from approximately 5.20% before the inflation report, making US Dollar-denominated assets more appealing to investors.

The US Dollar Index (DXY), which measures the Dollar's strength against six major currencies, rose by 0.46% to approximately 102.70, marking its highest level since April 2025. This overall rise in the Dollar's value adversely affected the AUD/USD pair, reversing its earlier gains. On the Australian side, attention shifted to Thursday's September employment report, which could impact expectations for the Reserve Bank of Australia's (RBA) monetary policy stance.

The latest Relative Strength Index (14) reading of 33 indicated that downside momentum was in effect but was nearing oversold territory, suggesting that while sellers continued to dominate, the decline might slow down rather than accelerate rapidly. On the upside, the 200-period Simple Moving Average (SMA) at 0.6968, followed by the 100-period SMA at 0.6974, constituted initial resistance levels.

The stronger barriers were observed at 0.6995 and 0.7005, with additional support needed at 0.7045, 0.7075, 0.7105, and 0.7140 for the AUD/USD to start reversing the downtrend. On the downside, immediate support was noted at 0.6932, preceding 0.6904 and 0.6883, where a break would potentially lead to a deeper decline. Conversely, a bounce from this support cluster would merely indicate consolidation within the ongoing downtrend.