AUD/USD slumps to yearly low near 0.6340 with Fed’s policy on the horizon

• AUD/USD falls sharply to near 0.6340 amid a cautious market mood ahead of the Fed’s policy announcement.
• The Fed is expected to signal fewer interest rate cuts for 2025.
• Souring consumer sentiment in Australia has boosted RBA dovish bets for the February meeting.

The AUD/USD pair tumbles to near the annual low around 0.6340 in the European session on Tuesday. The Aussie pair weakens as the US Dollar (USD) moves higher amid firm expectations that the Federal Reserve (Fed) could signal a more gradual policy-easing approach in its policy meeting on Wednesday after reducing interest rates by 25 basis points (bps) to 4.25%-4.50%.

According to the CME FedWatch tool, traders have priced in a 25-bps interest rate reduction on Wednesday but are leaning toward a pause in the policy-easing spell in January 2025. The tool shows that the Fed is 80% likely to leave interest rates unchanged in next month’s policy meeting.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, climbs above 107.00. Market sentiment remains risk-averse as S&P500 futures are significantly down in European trading hours. 10-year US Treasury yields climb to near 4.42%.

In Thursday’s session, investors will focus on the monthly Retail Sales data for November, which will be published at 13:30 GMT. The Retail Sales data is estimated to have grown at a faster pace of 0.5% from the former reading of 0.4%.

Meanwhile, the Australian Dollar (AUD) performs weakly across the board amid a dismal market mood and growing speculation that the Reserve Bank of Australia (RBA) could start reducing its key Official Cash Rate (OCR) from the February meeting.

A 2% decline in Australia’s Westpac Consumer Confidence in December compared to a 5.3% increase in November has raised concerns over the economic outlook. Rising concerns over China’s growth due to incoming tariffs from US President-elect Donald Trump have also weighed on the AUD, given that Australia is China's leading trading partner.