AUD Cautious Ahead of Fed Decision Amid Rate Hike Expectations

The Australian Dollar remains cautious ahead of the Federal Reserve's monetary policy decision on Wednesday. Markets widely expect the Fed to raise interest rates by 25 basis points (bps), with a 92% chance of such a move according to the CME FedWatch tool. This expectation supports the US Dollar, while prospects of further monetary tightening in Australia provide some support to the AUD.

The Reserve Bank of Australia has kept its Official Cash Rate unchanged at 4.35% at its last three meetings, following three consecutive increases earlier this year. However, persistent inflationary pressures are fueling expectations of further monetary tightening, with markets assigning a 78% chance that the RBA will raise the OCR to 4.6% at its next meeting.

AUD/USD trades around 0.7130 on Wednesday, virtually unchanged on the day. The near-term direction of the pair is likely to depend primarily on the message delivered by the Fed on Wednesday, with a message suggesting that the US central bank is in no hurry to tighten its monetary policy further potentially weighing on the US Dollar and supporting AUD/USD.