Australian Dollar pares gains as US Dollar steadies, RBA hike bets ease

The Australian Dollar pared some of its earlier gains on Friday as expectations of hawkish Federal Reserve (Fed) actions provided strength to the US Dollar (USD) and US Treasury yields following a pullback the previous day. By the time of reporting, the pair was trading around 0.6941, having reached a high of 0.6967 intraday but still set to decline for the week.

The US Dollar Index (DXY), tracking the USD's value against six major currencies, was at around 101.90, having touched a low of 101.58 intraday, its lowest in two weeks. Meanwhile, the 10-year US Treasury yield climbed towards 5.11% after slipping to a three-week low near 5.04% on Thursday. This was due to concerns about AI valuations and debt-funded investments prompting a sell-off in equities and leading investors to seek refuge in government bonds.

However, the USD found some support due to hotter-than-expected US inflation data and robust consumer spending, keeping hopes of additional Fed rate hikes high. Despite this strong data, traders still anticipate the Fed to take a pause at its October 27-28 meeting, with expectations shifting to December, as indicated by the CME FedWatch Tool showing a roughly 90% probability of a rate hike.

On the Australian side, the weaker-than-expected labor market report on Thursday dampened hopes for another Reserve Bank of Australia (RBA) interest rate hike. Employment declined by 39.3K in September, falling short of the forecasted 20K increase, while the Unemployment Rate remained at 4.7%. These figures suggest that higher borrowing costs are denting hiring.

Market analysts now expect the central bank to hold rates unchanged at its November 2-3 meeting after delivering four increases this year. However, September's meeting minutes reveal the RBA remains open to further tightening if needed to meet its inflation and employment targets. The Reserve Bank of Australia (RBA) is responsible for setting interest rates and managing monetary policy in Australia.

Decisions are made by a board of governors at 11 meetings per year, with ad hoc emergency meetings as required. The RBA's main goal is price stability, defined as an inflation rate of 2-3%, but also aims to contribute to currency stability, full employment, and economic prosperity for the Australian people. The primary tool for achieving this is through raising or lowering interest rates.

High interest rates strengthen the Australian Dollar, while lower rates weaken it. Other RBA tools include quantitative easing and tightening. Traditionally, higher inflation was considered detrimental to currencies as it reduces money's value. However, in modern times with relaxed cross-border capital controls, modestly higher inflation often leads central banks to raise interest rates, attracting more global capital and increasing demand for the domestic currency.

Macroeconomic data reflects an economy's health and can impact its currency's value. Investors prefer investing in safe and growing economies, leading to increased capital inflows and a stronger domestic currency. Indicators like GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence the Australian Dollar.

The Australian Dollar (AUD) regained momentum and extended its bounce towards 0.6950 in the Asian session on Friday. Fed Chair Jerome Warsh's comments reinforced selling pressure on the US Dollar, allowing the AUD to rise. Warsh stated his commitment to maintaining price stability without revealing future interest rate intentions.

USD/JPY faced fresh selling pressure and dropped 158.00 intraday amid rising USD selling. Fed Chair Warsh's non-committal remarks on future rate hikes weighed on the USD. Gold saw alternating gains and losses below $4,200 per troy ounce on Friday, reacting to a slight USD pullback and a tepid recovery in US Treasury yields. Crypto markets continued to struggle in October, with Bitcoin (BTC) sliding below $80,000 earlier in the week before rebounding to around $82,000 on Friday, as macroeconomic uncertainties loomed.