AUD/USD is trading modestly higher on Friday, recovering part of the previous session’s sharp decline after the pair reached multi-month highs in the upper 0.7200s. Despite failing to reclaim the 0.7200 level, the Australian Dollar is showing resilience even after stronger-than-expected US inflation data.

US core Consumer Price Index (CPI) inflation increased 0.3% month-on-month in August, exceeding expectations of 0.2% and marking its fastest monthly increase since April. Headline CPI rose 0.4% monthly, matching forecasts. The firmer core reading strengthened expectations that the Federal Reserve could raise interest rates at next week’s policy meeting.

Ordinarily, higher US Treasury yields and rising oil prices would provide additional support to the US Dollar. However, the Dollar has struggled to capitalize on these developments. Investors remain cautious about the US policy environment, fiscal outlook and concerns surrounding efforts to limit long-term borrowing costs. This uncertainty appears to be weakening the traditional relationship between yields, commodities and the Dollar.

The US two-year Treasury yield, which is particularly sensitive to expectations for Fed policy, climbed toward 4.62%, adding around three basis points. Meanwhile, the benchmark 10-year yield remains close to its highest level since 2023 and above 4.90%, maintaining upward pressure on borrowing costs.

Energy markets are also contributing to inflation concerns. Brent crude has climbed above $107 per barrel amid ongoing disruptions around the Strait of Hormuz, although West Texas Intermediate (WTI) has fallen roughly 3%. The International Energy Agency expects the global oil supply deficit to worsen this year, with inventories declining by another 95 million barrels last month.

The Federal Reserve decision next week is therefore the key catalyst for AUD/USD. A clear rate hike accompanied by hawkish guidance could strengthen the Dollar, while a cautious message could allow the Aussie to extend its recovery.

Trade Idea

Consider buying AUD/USD near 0.7160–0.7180, targeting 0.7240, with a stop below 0.7120 if Fed hawkishness strengthens Dollar demand.