AUD/USD lifts from three-week lows amid US Dollar softness, RBA in focus

• Australian Dollar regains ground as the US Dollar softens after in-line PCE data and weaker consumer sentiment.
• Focus turns to the RBA's monetary policy decision on Tuesday, with markets expecting rates to stay at 3.60%.
• US labor market data back in focus with NFP due on Friday.

The Australian Dollar (AUD) gains ground on Friday as the US Dollar (USD) loses momentum after Personal Consumption Expenditures (PCE) inflation figures came broadly in line with forecasts, while weaker consumer sentiment and renewed tariff worries dampened demand for the Greenback.

At the time of writing, AUD/USD is trading around 0.6550, recovering modestly after a sharp two-day fall to three-week lows. Meanwhile, the US Dollar Index (DXY) has eased from recent highs, trading near the 98.00 mark, as traders reassess the Federal Reserve's (Fed) monetary policy path.

The latest US Personal Consumption Expenditures (PCE) inflation report showed price pressures largely in line with expectations, reinforcing the view that disinflation remains slow. The core PCE rose 0.2% MoM in August, matching forecasts, while the annual rate held steady at 2.9%. The headline PCE rose 0.3% MoM, ticking up to 2.7% YoY, as personal income and spending also posted steady gains, highlighting resilient household demand.

Adding to the softer tone of the Dollar, the University of Michigan (UoM) survey showed that both consumer sentiment and expectations dipped slightly in September, while short- and long-term inflation expectations also edged lower. The softer household outlook, combined with the in-line PCE data, offered no fresh hawkish cues for the Fed, prompting some profit-taking in the Greenback and allowing the Aussie to rebound from recent lows.

Focus now shifts to the Reserve Bank of Australia's (RBA) interest rate decision on Tuesday. A recent Reuters poll of 39 economists showed all respondents expect the RBA to keep the cash rate steady at 3.60%. Market pricing via ASX futures also implies a very low probability of a rate cut, with most investors betting that the central bank will hold fire until it gets the Q3 Consumer Price Index (CPI) report in late October.

Major Australian banks remain divided on the timing of eventual easing. ANZ, CBA and Westpac continue to forecast a 25-basis-point cut before year-end, most likely in November, assuming inflation resumes its downward trend. By contrast, NAB has pushed back its expected first cut to May 2026, citing persistent price pressures in the services sector and robust household spending.

In the US, the spotlight now shifts to the Nonfarm Payrolls (NFP) report due on Friday, with the labor market expected to show a modest rebound. Economists forecast a gain of 39K jobs in September, up from just 22K in August.