AUD/USD exhibits strength above 0.6800 with RBA policy decision under spotlight

• AUD/USD strengthens above 0.6800 with RBA policy on the horizon.
• The RBA is expected to leave interest rates unchanged on Tuesday.
• The US Dollar recovers amid growing uncertainty over the Fed’s interest rate outlook.

The AUD/USD pair performs strongly above 0.6800 in Monday’s European session. The Aussie asset gains as the Australian Dollar (AUD) outperforms its major peers ahead of the Reserve Bank of Australia’s (RBA) monetary policy decision, which will be announced on Tuesday.

Traders expect the RBA to leave its Official Cash Rate (OCR) unchanged at 4.35%, with inflationary pressures remaining persistent and upbeat job growth. Therefore, investors will focus on fresh guidance on interest rates for the remainder of the year. Currently, financial market participants expect that the RBA will keep its OCR at its current levels by the year-end.

Meanwhile, the US Dollar (USD) bounces back amid growing doubts over the Federal Reserve’s (Fed) likely monetary policy action in its remaining two monetary policy meetings this year. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rises to near 101.00.

According to the CME FedWatch tool, the Fed will cut interest rates further by a total of 75 basis points (bps) in the November and December meetings, suggesting that there will be at least one 50 bps interest rate cut decision. For November’s policy meeting, the likelihood of the Fed reducing interest rates by 50 bps to 4.25%-4.50% is close to 50%.

On the contrary, a strong majority of over 100 economists expect that the Fed will cut its interest rates by 25 bps in each of its monetary policy meetings in the remaining year, according to a Reuters poll.

In today’s session, investors will keenly focus on the preliminary United States (US) S&P Global PMI data for September, which will be published at 13:45, as it will provide fresh cues on the nation’s current economic health.

The report is expected to show that the Manufacturing PMI came in higher at 48.5 than August’s print of 47.9 but remains below the 50.0 threshold. In the same period, activities in the service sector are estimated to have grown at a slower pace to 55.2 from the former reading of 55.7.