AUD/USD rally stalls below 0.6650 with all eyes on the Fed’s decision

The Australian Dollar is trading practically flat below a nearly two-month high, at 0.6654, hit on Tuesday. The pair consolidates gains after rallying more than 3% from November’s lows as investors bid their time ahead of the conclusion of the US Federal Reserve’s (Fed) monetary policy meeting.

The market has practically discounted a 25-basis-point Fed rate cut later on Wednesday. This will be the third consecutive one and is expected to be followed by a hawkishly tilted monetary policy stance, despite the wide divergence among policymakers.

Fed Powell and the “dot-plot” will grab the attention

Investors will be focusing on Chairman Powell’s ensuing press conference and on the bank’s interest rate projections, the so-called “dot-plot”, for further insight about the bank’s near-term monetary policy plans for 2026. Investors will be eager to contrast market expectations of two to three further rate cuts next year with the bank’s forward guidance.

On Tuesday, US President Donald Trump added pressure on the central bank in an interview with Politico, calling Powell “not a smart person” for refusing to cut interest rates fast enough and assuring that the support for “immediately slashing interest rates” will be a condition for the election of the next Fed chair.

In Australia, the Reserve Bank of Australia (RBA) left rates on hold on Tuesday, as widely expected, and governor Michelle Bullock warned about rising inflationary pressures, which suggests that the next move will be a rate hike, probably in the second half of 2026.

The Aussie Dollar rallied after the RBA’s decision, before trimming some losses amid the weak inflation levels seen in China, Australia’s main trading partner. The yearly inflation accelerated in November, as measured by the Consumer Prices Index, but monthly inflation contracted, and producer prices’ deflationary pressures deepened, underscoring the weak domestic consumption.

Economic Indicator

Fed Monetary Policy Statement

Following the Federal Reserve’s (Fed) rate decision, the Federal Open Market Committee (FOMC) releases its statement regarding monetary policy. The statement may influence the volatility of the US Dollar (USD) and determine a short-term positive or negative trend. A hawkish view is considered bullish for USD, whereas a dovish view is considered negative or bearish.

Economic Indicator

Fed Interest Rate Decision

The Federal Reserve (Fed) deliberates on monetary policy and makes a decision on interest rates at eight pre-scheduled meetings per year. It has two mandates: to keep inflation at 2%, and to maintain full employment. Its main tool for achieving this is by setting interest rates – both at which it lends to banks and banks lend to each other. If it decides to hike rates, the US Dollar (USD) tends to strengthen as it attracts more foreign capital inflows. If it cuts rates, it tends to weaken the USD as capital drains out to countries offering higher returns. If rates are left unchanged, attention turns to the tone of the Federal Open Market Committee (FOMC) statement, and whether it is hawkish (expectant of higher future interest rates), or dovish (expectant of lower future rates).