AUD/USD struggles around 0.6500 despite RBA's hawkish guidance

• AUD/USD is torn between risk aversion and RBA guidance.
• The RBA kept the door open to further tightening monetary policy to ensure inflation returns towards the 2% target.
• Fed Mester could hold out hopes for a rate cut.

The AUD/USD pair faces pressure to hold above 0.6500 late in the European session on Tuesday. Australian assets struggle despite the Reserve Bank of Australia (RBA) offering hawkish guidance on interest rates.

The RBA kept its official cash rate (OCR Rate) unchanged at 4.35%, leaving the door open for further policy tightening. In the monetary policy statement, RBA Governor Michele Bullock stated that rate cuts will only be discussed when the Council is convinced that inflation will return to the desired range.

Surprisingly, the RBA maintained a hawkish outlook on key rates despite easing price pressures. In the final quarter of 2023, the RBA's trimmed average CPI, a closed measure of core inflation, grew at a slower pace of 0.8% versus expectations of 0.9% and from a 1.2% rise in the July-quarter. September on a month-on-month basis. On an annual basis, core inflation softened to 4.2%, from 5.2% previously.

Meanwhile, market sentiment remains broadly bearish as investors view the Federal Reserve (Fed) as slow to pursue aggressive rate cuts. The Dollar Index (DXY) is approaching its 11-week high around 104.50 and is expected to continue rising.

Looking ahead, investors will focus on Cleveland Federal Reserve President Loretta Mester's speech for fresh guidance on interest rates. Loretta Mester is expected to dial back expectations for early rate cuts to avoid the fallout from persistent price pressures.