AUD/USD steadies as RBA rate cut expectations fade, Fed decision looms

• The Australian Dollar stabilizes as investors scale back expectations of a rate cut by the Reserve Bank of Australia.
• Comments from RBA Governor Michelle Bullock temporarily support AUD, with the labor market still seen as a little tight.
• The US Dollar remains under mid-pressure ahead of the Federal Reserve's policy decision.

AUD/USD steadies around 0.6560 on Monday at the time of writing, after reaching a three-week high at 0.6564 earlier in the day. The Australian Dollar (AUD) retains part of its recent gains, supported by reduced expectations of an interest rate cut from the Reserve Bank of Australia (RBA). Markets now assign only a 15% chance of a rate reduction next week, down from 60% previously, following RBA Governor Michele Bullock's remarks on Monday that the labor market remains "a little tight", despite the unexpected rise in unemployment.

Investors now turn their attention to Wednesday's release of Australia's monthly and third-quarter inflation data, due on Wednesday, for further guidance on the future path of interest rates. Recent Australian data point to a mixed economic picture, with the Manufacturing Purchasing Managers Index (PMI), released last week, falling to 49.7, signaling contraction, while the Services PMI rose to 53.1, indicating continued expansion.

On the international front, the AUD benefits from optimism surrounding progress in trade negotiations between the United States (US) and China. Both sides reportedly reached a consensus on key issues, paving the way for US President Donald Trump and Chinese President Xi Jinping to meet on Thursday. The prospect of a potential deal is boosting risk appetite, particularly as China remains Australia's largest trading partner.

In the United States, the US Dollar (USD) remains under pressure ahead of Wednesday's Federal Reserve (Fed) policy decision. Markets almost fully expect a 25-basis-point rate cut, which would bring the target rate range to 3.75%-4.00%. According to the CME FedWatch tool, there is a 96% chance of another rate cut in December, as softer-than-expected inflation and signs of a cooling labor market are reinforcing these expectations.

Overall, hopes of a durable US-China trade agreement and growing market confidence in further Fed easing keep risk sentiment supported, limiting losses for the Australian Dollar despite an uncertain backdrop.