The Australian Dollar (AUD) extended its gains for the third consecutive day, with AUD/USD trading around 0.7110 during Asian hours on Tuesday, as the US Dollar (USD) weakened amid diminishing expectations for further interest rate hikes by the Federal Reserve (Fed) [1]. This shift in sentiment followed an unexpected decline in July US Nonfarm Payrolls and last week's modest consumer price inflation data, which together have reduced market anticipation of a Fed rate increase at the upcoming policy meeting. According to the CME FedWatch Tool, the probability of a Fed rate hike next month has dropped to 35%, down from 47% a month earlier [1].
Geopolitical tensions also influenced market dynamics, with US President Donald Trump stating he has no interest in renewing the expiring agreement with Iran and highlighting the ongoing naval blockade of Iranian ports as evidence of US leverage. Trump reiterated his idea of declaring the critical waterway as US territory under total American control. In response, Iranian Foreign Ministry spokesman Esmail Baghaei asserted that an agreement remains elusive due to security complexities and the 'obstructionist behavior of destructive elements,' demanding that the US first lift its blockade [1].
In Australia, market attention is turning to upcoming domestic data releases, including the Westpac Consumer Confidence index for August and the second-quarter Wage Price Index. Wage growth is projected to rise by 0.8% quarter-on-quarter, matching the previous quarter's pace [1]. Strategists at Brown Brothers Harriman (BBH) note that these labor market releases are unlikely to materially alter the Reserve Bank of Australia's (RBA) policy outlook, with wages forecast to rise 0.8% quarter-on-quarter for a third straight quarter and dip to 3.2% year-on-year versus 3.3% in Q1 [1]. BBH suggests this profile reinforces the market assumption that the RBA is likely to remain on hold, with only limited repricing risk around these data prints.
RBA cash rate futures currently imply a 60% chance of one final 25 basis point hike by year end to 4.60%. However, BBH strategists argue that the risk is skewed towards a more extended pause in the RBA tightening cycle, as policy is already somewhat restrictive, suggesting markets may be overestimating the likelihood of further near-term moves from the central bank [1].
CONCLUSION
The Australian Dollar's recent gains are driven by a weaker US Dollar amid fading Fed rate hike expectations and stable domestic economic data. Market participants and strategists anticipate the RBA will likely hold rates steady, with only a limited chance of further tightening. Geopolitical tensions and upcoming Australian data releases are being closely watched, but are not expected to significantly shift the policy outlook.