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

• Tuesday’s RBA interest rate decision approaches as AUD/USD declines.
• Above-target inflation underpins widespread expectations of an RBA rate increase.
• With US elections and key economic releases ahead, US Dollar weakness provides only limited support.

AUD/USD is trading around 0.7010 at the time of writing. The pair is near one-week lows, down 0.33% on Monday, as the Australian Dollar (AUD) lags all its major counterparts. Ahead of Tuesday’s monetary policy announcement from the Reserve Bank of Australia (RBA), traders are likely reducing exposure. That is keeping the Aussie under pressure despite weakness in the US Dollar (USD).

A 25 basis points (bps) interest rate increase is widely anticipated from the RBA. This would be its fifth rise this year, lifting the cash rate to 4.85%, the highest since 2008. September’s headline CPI accelerated to 4.3% YoY from 4.0% in August, leaving inflation above the central bank’s 2%-3% target range. The annual trimmed mean measure also increased, reaching 3.6% from a revised 3.5%.

According to Rabobank’s FX strategists, “there is risk of subsequent rate hikes, depending on the trajectory of the oil price after the US mid-term elections,” while the AUD’s recent “lacklustre tone of the AUD” highlights market concerns that Governor Bullock may express greater unease 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.”

A mixed manufacturing picture emerged from China, Australia’s key trading partner. October’s RatingDog Manufacturing Purchasing Managers’ Index (PMI) slipped to 52.0 from 52.1, though it exceeded the 51.6 forecast. Production expanded at its quickest pace in six months. However, growth in export orders weakened and business confidence dropped to a nine-month low.

Following an Axios report that US President Donald Trump favours allowing more time for diplomacy with Iran, oil prices dropped more than 4% on Monday. ISNA also reported comments from Iranian President Masoud Pezeshkian that the Supreme Leader had given the government certain powers over negotiations. These developments came after last week’s Wall Street Journal report that Washington had urged Gulf states to prepare for possible military action against Iran following the US midterm elections.

Caution ahead of Tuesday’s US midterm elections is keeping the US Dollar under pressure, even with a hawkish Federal Reserve (Fed) outlook. Treasury yields have also declined as the recent AI-led technology sell-off fuels demand for government bonds, adding to the Greenback’s weakness. Around 101.65, the US Dollar Index (DXY) is close to one-week lows. The index measures the Greenback against a basket of six major currencies.

After the Fed left rates unchanged at 3.75%-4.00% last week, attention is shifting to US data for indications of its next policy move. Later on Monday, the ISM Manufacturing PMI is scheduled for release, with JOLTS Job Openings following on Tuesday. ADP Employment Change and the ISM Services PMI are due on Wednesday. Friday’s Nonfarm Payrolls (NFP) report closes the week’s schedule.