AUD Slumps on Firm Fed Rate Hike Bets Amid Rising Energy Costs

The Australian Dollar (AUD) has continued its decline against the US Dollar (USD), falling by 0.1% to around 0.7135 during the European trading session on Wednesday.

This downward trend is largely due to firm expectations that the Federal Reserve (Fed) will hike interest rates at its upcoming policy meeting this month, with current pricing indicating a 17bps increase for the 16th September FOMC meeting.

According to analysts at MUFG, the market's growing concern over further tightening is driven by rising energy costs, which are making it increasingly difficult for the Fed to leave rates on hold.

Fed Governor Michael Barr also emphasized the need for interest rate hikes if inflation remains higher, highlighting the importance of bringing down persistently high inflation despite a stable labor market and solid economic growth.

On the other side of the coin, strong Australian Q2 GDP data has increased Reserve Bank of Australia (RBA) interest rate hike expectations, with TD Securities revising its policy call to predict a 25bps hike at the end of the month, taking the target cash rate to 4.60%.