AUD/USD stumbles towards 0.6480s on dovish RBA, risk-off impulse

• AUD/USD is falling due to risk-aversion and heightened US T-bond yields underpinning the greenback.
• Fed’s Daly commented that she would like to see core prices down and foresees inflation would likely drop to 3% by 2023.
• US Services PMIs indices were mixed, though the ISM showed the resilience of the US economy.
• The RBA’s dovish 25 bps rate hike keeps the Australian dollar heavy.

The AUD/USD drops for the second consecutive day as the greenback snaps five days of losses, as risk aversion takes center stage. The speculation that central banks would pivot following the Reserve Bank of Australia’s dovish hike of 25 bps faded as Fed policymakers emphasized the need to tame inflation. The AUD/USD is trading at 0.6482 after hitting a daily high of 0.6526 at the time of typing.

AUD/USD falls on broad US dollar strength, dovish RBA

On Wednesday, Fed officials led by San Francisco’s Fed President Mary Daly crossed newswires. She said she would like to see core prices “stay flat or come down” and added that inflation would likely end in the next year at around 3% rather than 2%. Regarding the labor market, she said that “if Friday’s data shows hiring is slowing, that would be a welcome piece of news.”

Macroeconomic-wise, the US docket revealed the ISM Services PMI, which continued at expansionary territory, came at 56.7, above the street’s forecast but below the previous month’s reading. In the meantime, albeit improving, S&P Global PMIs for Services and Composite indices stayed below the 50-expansion/contraction line, at 49.3 and 49.5, respectively.

Earlier, the September US ADP National Employment data depicted that the economy added 208K private jobs to the economy, which could be a prelude for the US Nonfarm Payrolls report on Friday.

At the same time, the US Department of Commerce reported that the US Trade deficit narrowed by 4.3% to $67.4 billion in August, the lowest since May 2021.

On the Australian dollar side, the RBA’s decision to hike 25 bps caught traders by surprise, as they expected a 50 bps increase. AUD/USD traders reacted to the decision, sending the major sliding towards 0.6465.

RBA’s Governor Philip Lowe said, “The cash rate has been increased substantially in a short period of time,” and added that the board expects further tightening over the period ahead.

Elsewhere the US Dollar Index, a measurement of the buck’s value vs. a basket of peers, rallies more than 1%, reclaiming the 111.00 figure at 111.480, reflecting higher US Treasury bond yields. The US 10-year benchmark note rate edged up by almost 15 bps, at 3.779%, as market participants began to price in a 75 bps rate hike at Fed’s November meeting.

What to watch

The Australia economic docket will feature the AIG Construction Index and the Trade Balance, later in Thursday’s Asian session.

The US economic calendar will feature Initial Jobless Claims on Thursday, alongside Fed speaking, led by Chicago’s President Charles Evans, Cleveland’s Loretta Mester, and Board Members Lisa Cook and Christopher Waller.

AUD/USD Key Technical Levels