Australian Dollar holds firm amid hawkish Fed and RBA expectations

AUD/USD trades in a narrow range on Monday as markets weigh hawkish expectations from both the Reserve Bank of Australia (RBA) and Federal Reserve (Fed). At the time of writing, the pair trades around 0.7167, with a modest pullback in the US Dollar (USD) helping cushion the downside.

Fed rate hike bets regained traction following Chair Kevin Warsh‘s speech at the Jackson Hole symposium on Friday. Warsh emphasized that inflation remains well above target and reiterated that interest rates are the Fed’s primary tool to restore price stability.

Following Warsh‘s remarks, traders repriced September rate hike bets, sending the US Dollar to over one‑week highs while front‑end Treasury yields surged. The CME FedWatch Tool now shows a 65% probability of a 25‑basis‑point (bps) increase at next month’s meeting.

However, the Greenback lost momentum on Monday and retraced most of the gains recorded on Friday. The US Dollar Index (DXY), which tracks the Greenback‘s value against a basket of six major currencies, traded around 99.41, down 0.27% on the day. Nevertheless, expectations of tighter monetary policy should keep the dollar supported, with attention now turning to US labor market data due this week, which could influence the Fed’s September decision.

Geopolitical tensions also remain in focus after renewed hostilities between the US and Iran. This keeps energy‑driven inflation risks elevated, further reinforcing the case for major central banks to maintain a hawkish stance.

FX strategists at OCBC say their “base case remains that the RBA has reached the end of its tightening cycle.” However, they note that “a stronger-than-expected CPI print and resilient household spending have kept the risk of another rate hike alive,” prompting a notable shift in market pricing. “Following these releases, markets fully priced an additional 25bp hike by end-2026, up from around a 55% probability previously.”

Looking ahead, OCBC says, “we remain constructive on AUD over the next one to two quarters, supported by its attractive carry and the prospect of further Chinese policy stimulus.”

On Australia‘s economic docket this week, traders await Q2 Gross Domestic Product (GDP) figures alongside S&P Global PMI surveys for August. China's RatingDog PMI for August is also on the radar, with the release particularly significant given China is Australia’s largest trading partner.