Australian Dollar gains as US Dollar struggles amid fading Fed rate hike bets

AUD/USD extends its gains for the third successive day, trading around 0.7110 during the Asian hours on Tuesday. The currency pair continues to appreciate as the US Dollar (USD) remains subdued amid fading expectations for further rate hikes by the Federal Reserve (Fed).

A recent, unexpected decline in July US Nonfarm Payrolls, combined with last week's modest consumer price inflation data, has significantly reduced market anticipation of an interest rate increase next month. Consequently, expectations for a Fed rate hike at the upcoming policy meeting have dropped to 35%, down from 47% a month earlier, according to the CME FedWatch Tool.

Geopolitical tensions between the US and Iran are also impacting market dynamics following statements from both sides on Monday. US President Donald Trump announced he has no interest in renewing the expiring agreement with Iran, citing the ongoing naval blockade of Iranian ports as evidence of Washington's leverage and reiterating his idea of declaring the critical waterway as US territory under total American control.

Moreover, Iranian Foreign Ministry spokesman Esmail Baghaei asserted that an agreement remains elusive due to security complexities and the "obstructionist behavior of destructive elements," demanding that the US first lift its blockade.

Meanwhile, economic attention in Australia turns to upcoming data releases that could influence the market outlook. The domestic docket features the Westpac Consumer Confidence index for August, followed closely by the second-quarter Wage Price Index. Australian wage growth is projected to rise by 0.8% quarter-on-quarter, matching the expansion pace seen in the prior quarter.

Australia data seen as unlikely to shift RBA rate expectations

Strategists at Brown Brothers Harriman note that upcoming labour market releases are not expected to materially alter the policy outlook. BBH highlights that the "Australia Q2 wage price index (Wednesday) and July labor force survey (Thursday) are unlikely to shift the dial on RBA rate pricing," with wages forecast to "rise 0.8% q/q for a third straight quarter and dip to 3.2% y/y vs. 3.3% in Q1." In their view, this profile reinforces the current market assumption that the RBA is likely to remain on hold, with only limited repricing risk around these data prints.

RBA futures price in limited tightening as BBH flags risk of extended pause

Strategists at Brown Brothers Harriman note that “RBA cash rate futures imply 60% odds of one final 25bps hike by year end to 4.60%.” However, they argue that “the risk is skewed towards a more extended pause in the RBA tightening cycle because policy is already somewhat restrictive,” suggesting markets may be overestimating the likelihood of further near-term moves from the central bank.