Australian Dollar Holds Ground as US Dollar Softens on Fed Rate Cut Expectations

AUD/USD Stable as US Dollar Weakens and Australian Wages Meet Expectations

AUD holds gains amid dovish Fed outlook
The Australian Dollar (AUD) traded flat during Wednesday’s Asian session after gaining nearly 0.5% earlier this week. The AUD/USD pair found support as the US Dollar softened due to growing market confidence that the Federal Reserve (Fed) will begin cutting interest rates from its September policy meeting. US Consumer Price Index (CPI) data released on Tuesday showed a slight cooling in inflation, reinforcing the Fed's potential policy shift.

US inflation data boosts Fed cut expectations
US headline inflation held steady at 2.7% year-over-year in July, below the forecasted 2.8%, while the core CPI — excluding food and energy — rose 3.1%, up from June's 2.9% and slightly above market forecasts. This modest inflation data encouraged traders to raise bets for a September rate cut, with CME FedWatch Tool pricing in a 94% probability, up from 86% at the start of the week.

Australian wages in line with expectations
Domestically, Australia's Wage Price Index (WPI) for Q2 increased by 0.8% quarter-on-quarter, meeting economists’ expectations, but slightly below the previous quarter’s 0.9% rise. On a yearly basis, wages rose by 3.4%, exceeding the forecast of 3.3%. The figures suggest wage growth remains solid, though not accelerating fast enough to raise immediate inflation concerns.

RBA’s dovish tone follows recent rate cut
Earlier this month, the Reserve Bank of Australia (RBA) cut its Official Cash Rate (OCR) by 25 basis points to 3.60%, marking the third rate cut of the year. RBA Governor Michele Bullock noted that inflationary pressures are moderating, and further easing could be warranted if market conditions remain stable. However, she remained non-committal about the pace and timing of any additional policy moves, particularly if global financial markets become more volatile.

Outlook
With the Fed expected to cut rates and the RBA adopting a cautiously dovish stance, the AUD/USD pair could stay range-bound in the short term. Market focus now shifts to upcoming US Producer Price Index (PPI) data and additional commentary from Fed and RBA officials.