AUD/USD trims losses as Greenback weakens amid dovish Fed outlook and US-China frictions

• The Australian Dollar trims losses after earlier hitting its weakest level since August 22 amid renewed US-China trade tensions.
• Fed Chair Jerome Powell warns of "downside risks" to jobs but says inflation remains elevated, supporting a cautious policy stance.
• Markets price in nearly full odds of consecutive 25 bps Fed rate cuts in October and December, per CME FedWatch tool.

The Australian Dollar (AUD) trims losses against the US Dollar (USD) on Tuesday after sliding earlier to its weakest level since August 22, as fears of a revived trade war between the United States and China weighed on sentiment, given Australia's close trade ties with China.

At the time of writing, AUD/USD is down around 0.38% on the day, trading near 0.6491, after rebounding from intraday lows around 0.6440 as the Greenback softens on a dovish Federal Reserve (Fed) outlook and escalating trade tensions between Washington and Beijing.

Federal Reserve (Fed) Chair Jerome Powell, speaking at the National Association for Business Economics (NABE) conference on Tuesday, struck a balanced tone, acknowledging that the labor market has "softened considerably" since July but warning that inflation is "still on the way up." Powell noted that there are now "pretty significant downside risks" to employment, yet cautioned that moving too quickly could leave the inflation fight unfinished. His comments reinforced expectations that the Fed will proceed carefully, maintaining a data-dependent and gradual approach to policy adjustments in the months ahead.

Markets remain convinced that the Fed will continue lowering rates in the coming months despite Powell's cautious tone. According to the CME FedWatch tool, traders are pricing in a 97% probability of another 25 basis point (bps) interest rate cut at the October 29-30 meeting, followed by a 96% chance of a similar move in December. Some Fed policymakers have also shown willingness to support further rate reductions to support the labour market, reinforcing expectations of a measured easing path through year-end.

Earlier in the day, the Reserve Bank of Australia (RBA) published the minutes of its September 30 meeting, where policymakers decided unanimously to leave the cash rate unchanged at 3.60%. The Board observed that services and housing inflation may prove higher than expected in Q3, warning that domestic price pressures remain sticky even as growth moderates.

Members noted that monetary policy is "probably still a little restrictive" and reiterated that future moves will remain data-dependent and cautious. The RBA also highlighted a pickup in housing credit and prices, indicating that prior rate cuts are still filtering through the economy.

Looking ahead, traders will monitor China's Consumer Price Index (CPI) and Producer Price Index (PPI) data due on Wednesday, while global sentiment will continue to hinge on developments in the US-China trade dispute and the Fed's evolving policy stance.