AUD/USD pares gains ahead of Fed decision, Trump-Xi meeting

• The Australian Dollar trims earlier gains as traders turn cautious ahead of the Federal Reserve's policy decision.
• Hotter-than-expected Australian inflation data limits the case for further rate cuts by the Reserve Bank of Australia.
• Markets fully price in a 25-basis-point Fed cut, while attention shifts to Jerome Powell's tone and the Trump-Xi meeting.

AUD/USD trades around 0.6600 on Wednesday, up 0.30% on the day at the time of writing, after hitting a daily high at 0.6617 earlier in the day, but the Aussie remains capped below 0.6630, a ceiling that has contained the pair since mid-September. The Australian Dollar's (AUD) early surge following stronger-than-expected inflation data is fading, while markets hold their breath ahead of the Federal Reserve (Fed) policy announcement at 18:00 GMT.

Markets are fully pricing in a 25-basis-point cut that would bring the Federal Funds rate down to 3.75%-4.00%, but all eyes are on Fed Chair Jerome Powell's press conference for signals about the next move in December. With the ongoing US government shutdown disrupting economic data releases, the US Dollar (USD) faces two-way risks depending on how rate expectations adjust.

Australia's quarterly inflation release earlier in the day caught markets off guard. The Consumer Price Index (CPI) rose 1.3% QoQ in Q3 and 3.2% YoY, while the monthly CPI accelerated to 3.5% in September. These figures sharply reduce the chances of another near-term interest rate cut from the Reserve Bank of Australia (RBA).

Commerzbank now sees little chance of a cut in the short run, saying the bank's rhetoric will be key for the currency's direction. Standard Chartered has raised its terminal rate projection for the RBA to 3.60% and no longer expects an easing move in Q4. Rabobank argues that the RBA may already be at the end of its cutting cycle, though it warns of potential profit-taking on AUD/USD. Analysts at BBH note that the "Trimmed Mean CPI" measure, which accelerated to 1% QoQ and 3% YoY in Q3, "locks in" a hold decision next week, keeping a slightly bullish bias for the Australian Dollar in the medium term.

In the near term, the AUD's performance also depends on global sentiment toward China and on US President Donald Trump's Asia tour, which includes a key meeting with Chinese leader Xi Jinping on Thursday. Any progress toward a trade détente would typically support risk-sensitive currencies such as the AUD through stronger terms of trade. OCBC highlights that a firmer Chinese Renminbi and improved risk appetite are positive for the Aussie.

In the United States (US), TD Securities economists expect a 25-basis-point Fed cut with "cautious but accommodative" guidance on the labor market, while Deutsche Bank expects Chair Powell to emphasize balance sheet policy and possibly announce a timetable for ending Quantitative Tightening (QT). Against this backdrop, the USD carries asymmetric risks. A hawkish message could spark a rebound, while full confirmation of the dovish scenario into December would favor risk-sensitive currencies like the AUD.

Overall, AUD/USD is modestly higher but may remain stuck below 0.6630 until the Federal Reserve delivers its verdict. In the short term, Jerome Powell's message and the outcome of the Trump-Xi meeting will dictate the pair's direction.

AUD/USD daily chart. Source: FXStreet.