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Fundamental Forecast for the Australian Dollar: Bearish

• Australian Dollar back on the defensive on swelling Fed rate hike outlook

• RBA Financial Stability Review unlikely to trigger meaningful volatility

• FOMC minutes, US data, Fed-speak conspire to pressure Aussie further

What do past AUD/USD trading patterns hint about where prices are going? Find out here.

The Australian Dollar faced renewed selling pressure as firming Fed rate hike speculation weighed on risk appetite and drove an adverse shift in relative yield spreads. Needless to say, both dynamics proved to bode ill for a currency whose sensitivity to sentiment trends and core appeal to investors are primarily rooted in the offering of higher rates of return relative to G10 FX alternatives. More of the same is likely ahead.

The home-grown economic calendar is relatively quiet after last week’s RBA monetary policy meeting. Newly-minted Governor Philip Lowe mostly repeated familiar rhetoric in the statement emerging from the sit-down. If anything, his tone seemed to be ever so slightly more upbeat than his predecessor Glenn Stevens.

In fact, Mr Lowe reserved his most optimistic remarks for the housing market. He sang the praises of the Bank’s supervisory measures and painting a rosy picture of strengthened lending standards, cooling rents as well as slowing borrowing, turnover and price growth. This suggests next week’s RBA Financial Stability Review should offer little to upset established policy bets.

This is likely to put external forces back in the driver’s seat, with Fed rate hike speculation front and center once again. Minutes from September’s FOMC meeting are in the spotlight, with traders looking to reinforce the sense that the rate-setting committee has taken a deliberately hawkish turn. Indeed, Fed Chair Yellen all but promised tightening in December (as expected).

Further confirmation of the central bank’s conviction in the Minutes release may get an additional boost from an expected pickup in retail sales and consumer confidence. Taken together with a steady stream of commentary from Fed officials including Chair Yellen, all this may amount to forceful upward pressure on rate hike bets.

As it stands, traders see the probability of a rate increase in December at just over 64 percent. This leaves ample room for greater certainty to be factored into the markets. Should this materialize, the Australian Dollar is likely to find itself on the defensive once again as shifting yield spreads undermine demand and risk appetite sours at the prospect of stimulus withdrawal.