BNY strategists John Velis and David Tam have withdrawn their forecast for two Federal Reserve rate cuts in 2025, flagging two key obstacles: persistent disruption in the Strait of Hormuz and a US labour market that has refused to soften as expected.
The Strait of Hormuz is a critical oil transit chokepoint โ roughly 20% of global oil supply passes through it. Ongoing tensions there are keeping energy prices elevated, which feeds directly into US inflation and reduces the Fed’s room to cut rates.
A stronger-for-longer Fed stance is typically bearish for the Australian dollar. When US interest rates stay elevated relative to other economies, capital tends to flow toward USD-denominated assets, putting downward pressure on AUD/USD. Australian traders holding long AUD positions or trading commodity-linked pairs should factor this shift into their outlook.
The revised BNY view aligns with a broader repricing in rate expectations. Markets had been anticipating Fed easing to begin mid-year, but sticky inflation data and resilient non-farm payrolls have repeatedly pushed that timeline out. With BNY now joining that camp, the consensus for near-term cuts is thinning.
What Australian Traders Should Watch
- AUD/USD: A delayed Fed easing cycle removes a key tailwind for the Aussie dollar. Watch the 0.6350 region as near-term support.
- RBA vs Fed divergence: If the RBA continues its own cautious easing path while the Fed holds, the interest rate differential widens against AUD โ a material headwind.
- Hormuz developments: Any escalation in the Middle East that lifts oil further will reinforce the case for the Fed staying on hold longer.
- US labour data: The next non-farm payrolls and CPI releases will be pivotal in confirming or challenging BNY’s revised view.
The directional bias for AUD/USD leans bearish in the near term โ a Fed on hold while geopolitical risk remains elevated is not a supportive environment for risk-sensitive currencies like the Australian dollar.
Source: FX Street