Australian Dollar retreats as focus turns to RBA decision and US midterm elections

• AUD/USD weakens as markets await Tuesday’s RBA interest rate decision.
• With inflation still above target, markets broadly anticipate an RBA rate increase.
• Support from a weaker US Dollar remains modest ahead of US elections and crucial economic releases.

Selling pressure leaves AUD/USD near one-week lows on Monday, with the pair trading around 0.7010 at the time of writing, a decline of 0.33% on the day. The Australian Dollar (AUD) trails all its major counterparts as traders likely reduce exposure ahead of Tuesday’s monetary policy announcement from the Reserve Bank of Australia (RBA). That caution is weighing on the Aussie even as the US Dollar (USD) softens.

Above-target inflation underpins widespread expectations that the RBA will lift interest rates by 25 basis points (bps). A fifth increase this year would bring the cash rate to 4.85%, a level last seen in 2008. Against the central bank’s 2%-3% target range, headline CPI inflation picked up from 4.0% YoY in August to 4.3% in September. The annual trimmed mean measure also climbed, reaching 3.6% from a revised 3.5%.

Highlighting the possibility of further tightening, Rabobank’s FX strategists say, “there is risk of subsequent rate hikes, depending on the trajectory of the oil price after the US mid-term elections,” while the recent “lacklustre tone of the AUD” reflects market anxiety that Governor Bullock could express greater concern about “the health of the real economy.” Their assessment is that “simply put, expectations for further RBA policy tightening are likely to strengthen if Bullock focuses her commentary tomorrow on inflation risks and are likely to fall if, like the RBNZ, she instead focuses on economic headwinds.”

Signals from Australia’s key trading partner were mixed. China’s RatingDog Manufacturing Purchasing Managers’ Index (PMI) slipped from 52.1 to 52.0 in October, though it exceeded the forecast of 51.6. While factory output expanded at its quickest rate in six months, growth in export orders moderated and business confidence dropped to a nine-month low.

A decline of more than 4% in oil prices on Monday followed an Axios report that US President Donald Trump favours allowing more time for diplomacy with Iran. Separately, ISNA reported that Iranian President Masoud Pezeshkian said the Supreme Leader had given the government certain powers over negotiations. These developments came after the Wall Street Journal reported last week that Washington had told Gulf states to prepare for potential military action against Iran after the US midterm elections.

Caution ahead of Tuesday’s US midterm elections continues to weigh on the US Dollar, despite a hawkish outlook for the Federal Reserve (Fed). The Greenback also faces pressure from lower Treasury yields, as the recent AI-led sell-off in technology stocks has fuelled demand for government bonds. Near one-week lows, the US Dollar Index (DXY) is trading around 101.65. The index measures the Greenback against a basket of six major currencies.

Following the Fed’s decision last week to leave rates at 3.75%-4.00%, attention shifts to US economic releases for indications of its next policy move. Later on Monday, markets will receive the ISM Manufacturing PMI, with JOLTS Job Openings scheduled for Tuesday. ADP Employment Change and the ISM Services PMI follow on Wednesday, ahead of Friday’s Nonfarm Payrolls (NFP) report, which concludes the week’s releases.