Australian Dollar declines as dovish RBA outlook and firmer US Dollar weigh

• Interest rates reached 4.85% following the RBA’s increase, though a divided vote points to a possible pause in December.
• Despite persistently high Australian inflation, the currency remains under pressure from the central bank’s less hawkish guidance.
• Market caution supports the US Dollar, but lower bond yields and political deadlock restrict its gains.

After losing over 1% the previous day, AUD/USD is trading near 0.6910 in Friday’s Asian session and remains subdued. Less hawkish guidance from the Reserve Bank of Australia tempered expectations of additional interest rate increases, leaving the Australian Dollar weaker against the US Dollar (USD).

A 25 basis point increase on 3 November took Australia’s cash rate to 4.85%, but the central bank’s 6–3 vote exposed divisions, with three policymakers preferring unchanged rates. Together with the withdrawal of explicit references to further tightening, that split suggested a potential December pause. Even so, speaking at the Australian National University in Canberra on Thursday, RBA Deputy Governor Andrew Hauser indicated that inflationary pressures remained very high.

Ahead of the forthcoming US Nonfarm Payrolls report, broader investor caution provided support for the US Dollar. The release is expected to be crucial in determining market expectations for the Federal Reserve’s December policy decision.

Several countervailing forces have, however, offset that support. Lower US bond yields in recent trading, alongside continued hopes of diplomatic progress with Iran, are keeping pressure on the safe-haven dollar. In addition, the Democrats’ victory has fuelled expectations of a political stalemate in Washington. This could limit government spending and, in turn, slow economic growth.

USD expected to retain support from Fed tightening and institutional safeguards

The wider macroeconomic environment remains favourable for the Dollar, according to OCBC strategists, who note that “with US growth still solid, inflation sticky and the Fed on track for further tightening, we retain our view that the USD should remain supported, albeit with greater two-way risks.” In their assessment, a Democratic Senate “should also strengthen the institutional guardrails around Fed independence by making it harder for the administration to confirm additional allies to the Federal Reserve Board,” bolstering their expectation that continuity in Fed policy will support the currency despite increasing market volatility surrounding the outlook.