• AUD/USD edges higher to around 0.7120 in Tuesday’s early European session. 
• RBA hawkish tone supports the Australian Dollar. 
• Traders are pricing in a 56.5% probability of a Fed rate hike in October. 

The AUD/USD pair gains ground to near 0.7120 during the early European trading hours on Tuesday. The Australian Dollar (AUD) strengthens against the US Dollar (USD) following Reserve Bank of Australia (RBA) Governor Michele Bullock’s speech. Traders brace for the Fedspeak later on Tuesday for fresh impetus. 

RBA Governor Michele Bullock said on Tuesday that supply shocks are difficult for monetary policy to deal with, adding that policy needs to address the second-round effects of such shocks on inflation.

These comments came ahead of the RBA’s September 28-29 policy meeting. The Australian central bank is likely to raise its key interest rate next week as surging energy prices crystallise upside risks to inflation, Bloomberg Economics said, warning of a possible further hike in November. 

Money markets are pricing about a 90% chance the RBA will hike by a quarter-percentage point to 4.6%next week, according to Bloomberg.

The Federal Reserve (Fed) raised interest rates to 3.75%–4.00% and hinted at further hikes before year-end.  Hawkish remarks from Fed officials reinforced expectations for further interest rate hikes, supporting the Greenback. Chicago Fed President Austan Goolsbee said on Monday that the central bank cannot overlook repeated and persistent supply shocks. 

Meanwhile, St. Louis Fed President Alberto Musalem stated that additional rate increases may be necessary to achieve the Fed’s inflation target. Traders are now pricing in nearly a 56.5%  probability for a rate hike of at least 25 basis points (bps) at the Fed’s October meeting, according to the CME FedWatch tool, up from 43.5% a week earlier.

RBA hike odds climb as OIS market prices in aggressive move

Analysts at Commerzbank point out that rate expectations have shifted decisively ahead of next week’s RBA meeting, with the bank noting that the “RBA’s OIS market is now pricing in 85% chance of a 25bp hike during next week’s monetary policy board meeting.” They suggest this elevated probability underscores the market’s conviction that the RBA is leaning toward further tightening, reinforcing support for the Australian Dollar into the decision.

Technical Analysis: AUD/USD maintains a constructive outlook in the near term

In the daily chart, AUD/USD holds above both the Bollinger Bands lower band and the 100-day simple moving average (SMA), which collectively underpin a constructive near-term tone. Price remains below the Bollinger middle band, suggesting the advance is still capped by overhead supply, while the Relative Strength Index (14) at 47 stays near neutral, hinting at consolidative rather than impulsive momentum.

On the topside, initial resistance emerges at the Bollinger middle band around 0.7160, ahead of a higher barrier at the Bollinger upper band near 0.7235. On the downside, immediate support is seen at the lower Bollinger band at 0.7085, followed by the 100-day SMA at 0.7075, where a deeper pullback would be expected to attract dip-buying interest as long as these underlying levels hold.