Australian Dollar falls close to 10-month lows

• Hawkish Fed remarks strengthen expectations of a December rate rise, lifting the US Dollar and weighing on AUD/USD.
• At 5.3% in November, Australia’s Consumer Inflation Expectations are unchanged and still at their highest since June.
• Expectations that the RBA will leave interest rates unchanged for the foreseeable future weigh on the Australian Dollar.

Trading near 0.6840 in Thursday’s Asian session, AUD/USD extends its decline into a third consecutive day. An increasingly hawkish outlook for Federal Reserve (Fed) policy is supporting the US Dollar (USD), pushing the pair towards its lowest levels in nearly 10 months.

US Consumer Price Index (CPI) inflation exceeded expectations, prompting traders to increase bets on a December rate rise. Those expectations gained further support earlier this week when Fed Governor Christopher Waller indicated that he would favour a quarter-point increase, or even a half-point rise should inflation deteriorate. The CME FedWatch Tool now puts the market-implied probability of a December rate rise at around 87%, alongside a nearly 13% chance of a larger 50 basis point increase.

November’s reading for Australia’s Consumer Inflation Expectations was unchanged from the previous month at 5.3%, keeping the measure at its highest since June. The elevated reading follows September’s headline inflation figures, which showed an acceleration to a six-month high of 4.3%, still well above the Reserve Bank of Australia’s (RBA) target range of 2–3%.

Although price pressures remain persistent, growing speculation that the RBA’s tightening cycle is over continues to weigh on the Australian Dollar (AUD). Markets increasingly expect interest rates to remain unchanged for the foreseeable future. Further out, roughly 28 basis points of RBA rate cuts in 2027 are priced in, according to Prime Terminal data.

Rising bond yields put pressure on Australia’s leveraged housing markets

The latest rise in global bond yields is starting to affect interest-sensitive sectors, warn strategists at Societe Generale. They note that “the rise in bond yields, however, is feeding through to leveraged housing markets, and Australia is certainly one of them.” Their assessment adds to concerns about the particular vulnerability of Australia’s heavily indebted households and housing market to increasing funding costs.