The AUD/USD pair saw a slight increase after declining for two consecutive days, now trading near 0.6960 during Asian hours on Thursday. However, it could experience downward pressure as the US dollar (USD) may gain strength following the Federal Reserve’s pause on rate hikes.
During its July policy meeting, the Fed chose to maintain interest rates in the 3.5% to 3.75% range, a decision that was largely anticipated. Yet, this choice revealed an underlying hawkish sentiment.
Several Fed officials—Dallas Fed President Laurie Logan, Cleveland Fed President Beth Hammack, and Minneapolis Fed President Neel Kashkari—objected to this decision, advocating for a 25 basis point increase instead. Federal Reserve Chairman Kevin Warsh reinforced this position in a post-meeting press briefing, indicating that while the Fed wouldn’t offer guidance on future interest rate movements, it was dedicated to achieving its 2% inflation target.
Fed Stance on Policy Remains Bullish, Keeping Dollar Traders Engaged
Warsh’s remarks during the press conference conveyed a notably stronger tone, reflected in an FXS Speech Tracker score of 7 out of 10, versus the historic score of 6. This signifies a heightened commitment to addressing inflation. He stressed the “tremendous resilience” of the economy, alongside a strong labor market, consistently reiterating that “there is only one target, and that is 2%” while noting that “inflation cannot recover in nine weeks.” This shows a steadfast and patient approach towards tightening conditions. His focus on longer trends rather than short-term data, alongside a clear refusal to contemplate raising the inflation target, underscores a firm hawkish bias favoring the dollar.
The FXS Fed Sentiment Index climbed by +18.94 points to 147.58, comfortably within hawkish territory and in line with the assertive tone captured by the FXS Speech Tracker. Being well above the neutral benchmark of 100, this suggests that markets will likely need to account for a sustained anti-inflationary approach and potential upside risks for the dollar as Warsh reaffirms his commitment to the 2% target.
The Australian dollar (AUD) could struggle as the yield on Australia’s 10-year government bonds falls toward 4.9%, dipping from recent highs following disappointing inflation statistics. The headline inflation unexpectedly decreased to a four-month low of 3.8% in June, falling short of both May’s figure and market expectations of 4.0%. While inflation is still above the Reserve Bank of Australia’s (RBA) target band of 2% to 3%, market expectations for additional rate hikes this year have sharply declined, dropping to about 50% from over 90% before the reports emerged.
This economic slowdown seems to strengthen speculations that the RBA may opt to keep its policy steady at the upcoming Aug. 11 meeting. However, the challenges faced by the Australian dollar might offer it some support, as the RBA Governor recently mentioned that he cannot completely dismiss the possibility of rate increases if required to manage inflation.
Australian Inflation Persists as RBA Focuses on Underlying Pressures
Strategists at BNY highlighted that Australia’s headline CPI in June 2026 increased by 3.8% year-on-year, remaining unchanged from May. This underscores that inflation in Australia showed little sign of subsiding. They also pointed out that underlying price pressures were still significant, noting that “underlying inflation, as gauged by a trimmed average, has stayed stable at 3.6% year-on-year without any change month-on-month.” This combination of headline and core inflation data sheds light on the enduring inflation dynamics affecting RBA policy and Australia’s overall economic performance.
