The Australian dollar weakened to around 0.7010 against the US dollar in early Asian trading on Monday (September 28). The US dollar strengthened against the Australian dollar due to rising US Treasury yields and increased bets on further interest rate hikes by the Federal Reserve. The Reserve Bank of Australia will be in focus later on Tuesday. Hawkish comments from Fed officials, following the recent rate hike to the 3.75% to 4.00% range, have fueled speculation about additional rate hikes. The market is currently pricing in a 65.9% probability of a Fed rate hike in October, up from 57.6% a week ago and 9.4% a month ago.

Federal Reserve officials have been issuing hawkish statements, raising the probability of a rate hike in October to 65.9%.

Cleveland Fed President Mark Hammark said Friday that she is concerned the risk of persistently high inflation leading the American public to perceive high prices as the norm, a situation the central bank cannot allow to occur. Philadelphia Fed President Paulson stated, "Some moderate further tightening may be necessary." The market is pricing in a 65.9% probability of a Fed rate hike in October, up from 57.6% a week ago and 9.4% a month ago. Her emphasis on the "biggest risk" being the formation of an inflationary mindset, coupled with comments about steady growth and a stable job market, underscores concerns about persistently above-target inflation and the potential for continued capital spending to solidify price pressures.

The Reserve Bank of Australia's decision on Tuesday: Interest rates are expected to rise to 4.60%; focus on the Bullock press conference.

The Reserve Bank of Australia (RBA) is likely to deliver a 25-basis-point rate hike to combat sticky inflation, raising the official cash rate to 4.60%, the highest since November 2011. Traders will look to Governor Bullock's post-policy press conference for further clues on whether the central bank is prepared for a second rate hike in November or prefers to wait and see for the remainder of the year. The head of economics at the Commonwealth Bank of Australia stated, "Given the inflationary backdrop, the risk lies in the need to further tighten monetary policy after September. However, pushing monetary policy further into a restrictive range is not an easy task."

The employment data sent mixed signals, but rising participation rates supported the Australian dollar's resilience.

Elias Haddad of Brown Brothers Harriman noted that the latest Australian labor force data sent mixed signals, with the unemployment rate unexpectedly rising 0.1 percentage point to 4.6%, higher than the consensus and the RBA's year-end forecast of 4.5%. However, the institution emphasized that "the rise in the unemployment rate largely reflects an increase in the participation rate, indicating that there is still some tightness in the labor market," reinforcing the view that underlying conditions remain solid. Haddad believes that "the bottom line: the increased probability of further RBA rate hikes limits policy divergence with the Federal Reserve, supporting the Australian dollar against the US dollar." He also stressed that "Australia's strategic exposure to energy, AI, and defense-related commodities remains a significant long-term tailwind for the Australian dollar," providing structural support for the currency beyond the near-term policy outlook.

Summarize

The Australian dollar weakened to around 0.7010 against the US dollar in Asian trading on Monday, supported by hawkish signals from the Federal Reserve and rising US Treasury yields. Hawkish comments from Hammark and Paulson raised the market's pricing of a 65.9% probability of an October rate hike. The Reserve Bank of Australia (RBA) is expected to raise rates by 25 basis points to 4.60% on Tuesday, the highest since November 2011. The focus will be on whether Bullock's press conference hints at a second rate hike in November. Australian employment data was mixed, with the unemployment rate rising to 4.6%, driven by the participation rate. Brown Brothers Harriman believes the increased probability of further RBA rate hikes limits the policy divergence from the Federal Reserve, supporting the Australian dollar. They also believe Australia's strategic exposure to energy, AI, and defense-related commodities is a long-term tailwind. Going forward, attention will be focused on the RBA's decision and Bullock's remarks, speeches by Federal Reserve officials, US inflation and employment data, and whether the RBA will raise rates again in November. (Australian dollar to US dollar daily chart, source: EasyForex) At 8:03 Beijing time, the Australian dollar to US dollar exchange rate was 0.7009/10.