How is an inflation surprise driving fresh momentum in the Australian Dollar ahead of the Fed decision?

• The Australian Dollar rises 0.17% on Wednesday as stronger-than-forecast inflation lends support.
• Above the 4.2% forecast, Australia's annual inflation rate climbed to 4.3% in September.
• Investors are focused on the Fed Chair's remarks as the central bank is expected to hold interest rates steady on Wednesday.

Expectations of another Reserve Bank of Australia (RBA) interest rate hike are supporting the Australian Dollar (AUD) after domestic inflation exceeded forecasts. AUD/USD is trading around 0.7035 at the time of writing on Wednesday, up 0.17% for the day.

September's Consumer Price Index (CPI) rose 4.3% YoY in Australia, exceeding both August's 4% reading and the market forecast of 4.2%, according to figures published by the Australian Bureau of Statistics (ABS) on Wednesday. The monthly increase also surprised on the upside: consumer prices climbed 0.8%, against expectations of 0.7% and a 0.4% rise in the preceding month.

The quarterly figures also point to elevated inflationary pressures. Consumer prices increased 1.3% QoQ in the third quarter, up from 0.6% in the second quarter. September's underlying inflation, as measured by the Trimmed Mean CPI, stood at 0.3% MoM and 3.7% YoY.

For the RBA, these readings confirm that inflationary pressures remain persistent across the Australian economy, making its monetary policy outlook more complicated. With the central bank working to contain inflation, the renewed acceleration in consumer prices has increased speculation that a rate hike could come as early as the November meeting.

Investors' expectations of potentially higher returns on Australian Dollar-denominated assets are lending support to the currency as further monetary tightening comes into focus. AUD/USD is benefiting from this backdrop, though forthcoming US monetary policy decisions could shape its direction.

Wednesday's monetary policy decision from the Federal Reserve (Fed) is the main focus in the United States (US). After a 25-basis-point (bps) increase in September, the central bank is widely expected by markets to retain its benchmark interest rate within the 3.75%-4.00% range.

Despite continuing US inflation pressures, investors see only around a 9% probability of another rate hike at this meeting, according to the CME FedWatch tool. September's annual US CPI reading accelerated notably to 3.7% YoY from 3.4% previously. Markets nevertheless expect a further round of monetary tightening in December, potentially cushioning losses in the US Dollar (USD) and restricting additional upside in AUD/USD.

Fed Chair Kevin Warsh's post-meeting press conference will consequently attract close attention. While recently reaffirming his commitment to price stability, Warsh emphasised that he does not wish to prejudge forthcoming monetary policy decisions.

Whether the Fed plans to extend its monetary tightening cycle before year-end will be a key question for investors. The US Dollar could gain support from a more hawkish message. A more cautious stance, by contrast, could give AUD/USD room to rise further as expectations of higher Australian interest rates continue to favour the Aussie.

AUD/USD technical analysis: Can the pair extend its gains?

A modest bullish bias remains intact on the one-hour chart, where AUD/USD trades at 0.7037 above the 100-period simple moving average (SMA) of 0.7026 and the 200-period SMA of 0.7010. Rising trend-line support lies near 0.7020. With the pair consolidating just below near-term resistance, the Relative Strength Index (14) is around 56, signalling steady upward momentum that is not yet overstretched.

The horizontal barrier near 0.7040 provides immediate resistance, with 0.7055 and 0.7075 the next levels to watch. Supply is likely to increase around 0.7075 if the rally continues. Initial downside support comes from the 100-period SMA near 0.7026, followed by the trend-line area around 0.7020. Should intraday buyers retreat, the 200-period SMA at 0.7010 provides a further cushion.

(The technical analysis of this story was written with the help of an AI tool. Know more.)