AUD/USD Caught in Rate Hike Crossfire

The Australian dollar's eight-week winning streak was snapped after Fed Chair Kevin Warsh's hawkish Jackson Hole speech revived US rate-hike bets. However, stronger Australian inflation and household spending data also raised expectations of another RBA hike, leaving AUD/USD caught between competing policy risks.

The RBA-Fed cash rate spread would narrow to just 10bp if the RBA hikes once and the Fed twice. This makes relative rate expectations increasingly important for AUD/USD, particularly if markets become more confident that the Fed has two more hikes to deliver.

Australia's Q2 GDP report on Wednesday could reinforce RBA hike bets, while Friday's US nonfarm payrolls report will test Fed hike bets and the US dollar. Stronger growth in Australia's GDP would add to the case that demand remains too resilient, particularly after hot inflation and household spending data.