AUD/USD trades higher slightly above 0.7100, Fed’s policy remains in focus

The AUD/USD pair trades marginally higher to near 0.7115 during the European trading session on Wednesday. The Aussie pair is expected to trade broadly sideways as investors await the Federal Reserve’s (Fed) monetary policy outcome at 18:00 GMT.

According to the CME FedWatch tool, traders are confident that the Fed will leave interest rates unchanged in the current range of 3.50%-3.75%. This would be the second straight meeting in which the Fed will avoid any monetary policy adjustment.

Speculation that the Fed will hold borrowing rates steady has been intensified due to higher oil prices amid conflicts in the Middle East, which involve the United States (US), Israel, and Iran.

In the policy meeting, investors will also focus on the Fed’s dot plot, which shows policymakers’ collective forecast for the Federal Fund Rate in the near-to-long term.

The CME FedWatch tool shows that the central bank is unlikely to cut interest rates before the September policy meeting. Also, the odds of an interest rate cut in the same meeting are slightly over 50%.

Meanwhile, the Australian Dollar (AUD) trades broadly firm amid the expectation that the Reserve Bank of Australia (RBA) could raise interest rates further in the near term. On Tuesday, the RBA hiked its Official Cash Rate (OCR) by 25 basis points (bps) to 4.1%, and Governor Michele Bowman warned that price pressures could accelerate further amid ongoing Middle East tensions.

Earlier in the day, Australia’s Treasurer Jim Chalmers warned that the Iran war could add a further quarter of a percentage point to headline inflation.

(This story was corrected at 11:10 GMT to say in the fifth paragraph that the central bank is unlikely to cut interest rates before the September policy meeting, not traders)