Why AUD/USD Edges Higher as Policy Divergence Widens Between Fed and RBA

The currency pair consolidates near 0.6600 as traders brace for the US inflation report

The AUD/USD is staging a steady performance above the 0.6600 threshold during Friday’s Asian trading session, holding ground just shy of its two-month peak. The technical setup suggests bulls are taking a measured pause before the release of critical US inflation data, setting up an intriguing backdrop for the world’s most traded currency pair.

The fundamental narrative reveals a fascinating policy split between the two central banks. While the Federal Reserve signals its readiness to trim rates—with markets now pricing in a 90% probability of a 25 basis point cut next week—the Reserve Bank of Australia is sounding more cautious. RBA Governor Michele Bullock’s recent parliamentary testimony highlighted concerns about inflation’s stubborn grip on the economy, suggesting that sustained price pressures could alter the central bank’s rate trajectory. This divergence is becoming the primary driver supporting the aud against its US counterpart.

The American Inflation Wild Card

Today’s Personal Consumption Expenditure (PCE) Price Index release carries outsized importance for USD dynamics. The Fed views the core PCE reading—which strips out volatile food and energy components—as the gold standard for measuring underlying inflation pressures. With the consensus expecting a 2.9% year-over-year figure matching the previous month’s reading, traders are scanning for any surprises that could reshape rate-cut expectations.

A hotter-than-expected core PCE print could prompt a reassessment of December’s rate-cut odds and deliver a short-term boost to the US dollar. Conversely, a softer reading would reinforce the bearish USD narrative and potentially extend AUD/USD’s two-week rally.

Why the RBA Outlook Matters

Meanwhile, the Reserve Bank of Australia faces a different puzzle. Despite inflation cooling from its peaks, Governor Bullock signaled that price stability remains elusive within the central bank’s 2% to 3% target band. The RBA’s monitoring stance—watching for signs that inflation pressures become permanent—raises the possibility of rate hikes next year, a scenario that would support the aud and underpin the AUD/USD pair’s upside bias.

This contrasts sharply with the Fed’s loosening cycle, creating an attractive carry differential for investors willing to hold Australian dollar positions.

Technical Backdrop and Trend Context

The currency pair is tracking toward its second consecutive week of gains, a feat that underscores the strength of the bull case. The consolidation phase playing out near 0.6600 appears to be a natural pause within the uptrend, with support established at previous levels and resistance residing near the two-month highs.

As the day unfolds, the path of least resistance for spot prices tilts upward, but near-term direction hinges on inflation data. Until the PCE report hits the wires, expect measured positioning as participants avoid overextending ahead of such a pivotal data point.

The divergent policy backdrop between the Fed and the RBA, combined with the technical strength beneath the aud, suggests that any US inflation disappointment could reinvigorate AUD/USD’s upward march into next week.