The Australian dollar (AUD) has strengthened against the U.S. dollar (USD), with the AUD/USD currency pair rising for a second consecutive day. This movement is driven by a combination of factors, including the potential for a U.S. government shutdown and differing monetary policy expectations between the two countries.
The U.S. dollar is facing downward pressure as the October 1 deadline for a government funding deal approaches. Simultaneously, expectations that the Reserve Bank of Australia (RBA) will maintain its current interest rates are providing support for the Australian currency.
Key Takeaways
- The Australian dollar is gaining against the U.S. dollar due to potential U.S. government shutdown risks.
- Markets anticipate the Reserve Bank of Australia will hold interest rates steady at its upcoming meeting.
- Expectations for a U.S. Federal Reserve rate cut in October are rising, weighing on the U.S. dollar.
- Australia reported a smaller-than-expected budget deficit, providing additional support for its currency.
US Dollar Weakens on Political and Economic Headwinds
The primary factor weighing on the U.S. dollar is the increasing risk of a government shutdown. If lawmakers fail to reach a funding agreement by October 1, non-essential government services will cease, which could disrupt economic activity and delay the release of important data, such as the September payrolls report.
According to reports, U.S. President Donald Trump is scheduled to meet with congressional leaders to negotiate a solution. The outcome of these discussions is being closely watched by financial markets.
New Tariffs Looming
The potential shutdown coincides with the implementation of new U.S. tariffs. President Trump has announced plans for a 100% tariff on certain pharmaceutical imports and additional tariffs of 50% on kitchen cabinets and 25% on trucks, all set to begin on October 1.
Federal Reserve Rate Cut Expectations Grow
Adding to the pressure on the greenback are growing expectations that the U.S. Federal Reserve will cut interest rates again. Recent inflation data has reinforced this view. The Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred inflation gauge, rose 2.7% year-over-year in August.
The core PCE, which excludes volatile food and energy costs, increased by 2.9%. While these figures met analyst expectations, they have not altered the market's outlook for monetary policy easing.
Market Pricing for Fed Action
According to the CME FedWatch Tool, markets are currently pricing in an 88% probability of a Fed rate cut in October and a 65% chance of another reduction in December. This outlook for lower U.S. interest rates makes the dollar less attractive to investors seeking higher yields.
In contrast to the inflation data, a recent report showed the U.S. economy performed better than initially thought in the second quarter. The Gross Domestic Product (GDP) grew at an annualized rate of 3.8%, surpassing the previous estimate of 3.3%.
Australian Dollar Supported by RBA Stance and Fiscal Data
The Australian dollar is finding support from the widespread expectation that the Reserve Bank of Australia will not cut interest rates at its upcoming meeting on Tuesday. This view was solidified after recent data showed a higher-than-expected inflation rate in Australia.
Australia's Monthly Consumer Price Index (CPI) increased by 3.0% year-over-year in August, up from 2.8% in July. Following this data, the probability of an RBA rate cut in the near term has significantly decreased.
"Recent rate cuts should support household and business spending," RBA Governor Michele Bullock stated recently, while also stressing that the central bank "must stay vigilant to changing conditions and be ready to respond if needed."
Market pricing reflects this sentiment, with traders seeing only a 6.5% chance of a rate cut at the next meeting. The probability for a cut at the November meeting has also fallen to around 38%.
Positive Fiscal News from Australia
The Australian government also released positive fiscal news. For the year ending June 2025, the country posted a budget deficit of approximately A$10 billion. While this marks an end to two years of surpluses, the figure was substantially better than the Treasury's forecast of a A$27.9 billion deficit.
A smaller deficit can be viewed as a sign of economic resilience, further bolstering confidence in the Australian dollar.
Diplomatic Meetings on the Horizon
The White House has announced that Australian Prime Minister Anthony Albanese and U.S. President Donald Trump are scheduled to meet in Washington, D.C., on October 20. The meeting will focus on discussions surrounding the Aukus nuclear submarine agreement.
AUD/USD Technical Outlook
From a technical standpoint, the AUD/USD pair is currently trading around the 0.6560 level. The pair has been trading within a descending channel pattern on the daily chart, which typically suggests an underlying bearish trend.
The 14-day Relative Strength Index (RSI), a momentum indicator, is positioned just below the 50 mark. A reading below 50 often indicates that sellers have a slight advantage.
Key Levels to Watch
For traders watching for further downward movement, immediate support is located at the 50-day Exponential Moving Average (EMA) near 0.6550. A break below this level could open the way to the lower boundary of the descending channel, around 0.6500.
If the pair fails to hold the 0.6500 level, it could face increased selling pressure, potentially targeting the three-month low of 0.6414, which was reached on August 21.
On the upside, the first level of resistance is the nine-day EMA at 0.6579. A more significant barrier is the upper boundary of the descending channel, near 0.6590. A decisive move above this channel would weaken the bearish outlook and could signal a potential shift in momentum, with the pair possibly aiming for the 11-month high of 0.6707, recorded on September 17.
