Brown Brothers Harriman (BBH) analysts expect the Reserve Bank of Australia (RBA) to pause its policy rate at 4.35% after three consecutive 25 basis point hikes since February, citing soft Q1 GDP, weak labor data, and subdued sentiment as reasons to fade market pricing for another hike this year [1]. RBA cash rate futures currently imply a 60% chance of one final 25bps hike by year end to 4.60%, but BBH does not anticipate this materializing [1]. The Australia–US 2-year yield spread suggests that AUD/USD could undershoot 0.7000 in the near term, reflecting downside risks for the Australian Dollar [1].
On the US side, BBH’s Elias Haddad notes that the US Dollar has trimmed some of its post-payroll gains due to optimism over a US-Iran breakthrough, which pushed Brent crude oil prices to a three-month low [2]. Despite this, BBH maintains that the USD can edge higher in the near term, supported by resilient US economic activity and expectations of a hawkish Federal Reserve hold [2]. The Federal Open Market Committee (FOMC) has shifted from an easing to a neutral bias, with improved US labor demand and rising inflation [2]. The focus is now on the degree of hawkishness in the Fed's stance and whether it aligns with Fed funds futures pricing for a 25bps hike by year end or leans against it [2]. The upcoming dot plot is expected to shift from implying a 25bps cut in 2026 to a median projection consistent with a 25bps hike [2].
BBH concludes that a hawkish Fed hold should support the USD, although there is a mention of potential risks if Kevin Warsh were to lead the Fed, which could impact market sentiment beyond this week’s decision [2].
Overall, the combination of a data-dependent RBA pause and a hawkish Fed stance points to near-term downside for the Australian Dollar and support for the US Dollar, with yield spreads and central bank guidance as key drivers [1][2].
CONCLUSION
BBH analysis indicates that the Australian Dollar faces downside risks due to a likely RBA pause and weak domestic data, while the US Dollar is supported by resilient economic activity and a hawkish Fed outlook. Yield spreads reinforce the potential for AUD/USD to move lower in the near term. Market participants are closely watching central bank signals for further direction.