Doubt seeds sown on Fed rate hike, AUD benefits

The US dollar remained under pressure overnight, with little in the way of fresh inspiration to keep the bids rolling in. It’s apparent the FOMC minutes released on Wednesday didn’t give markets participants the reassurance needed to suggest December’s the month the Fed lifts its federal funds rate. Given the level of expectancy built in, it’s natural to see periods of consolidation as participants respond to data points, Fed commentary, and the subsequent market conjecture.

A good barometer of the USD is the US dollar index (DXY) which tracks its performance against six of its major counterparts. Certainly, looking at periods from November 2014 to March 2015 and again from October to date, we’ve seen periods of accelerated demand. Overall, expectations of policy changes and stronger data (and external factors such as policy divergence and weak data abroad) have kept the US dollar well supported. The problem is of course, markets need constant reassurance that expectations (priced-in) will be fulfilled. The minutes released on Thursday, while upbeat, failed to do so and thus comes a period of natural consolidation.

This dollar consolidation has of course had a positive residual impact on its major counterparts. Take the Aussie dollar for example, which has snapped higher through 72-figure overnight. Some believe that the policy divergence we’re likely to see is actually a positive thing for the local unit, with today’s AFR covering a view that the Aussie dollar could be a beneficiary of a US rate hike.

Whatever the case, convention would suggest, the Aussie should reflect a lack of demand due to the divergence in monetary policy (lower interest rates in Australia vs higher US interest rates). In addition, continually softer commodity prices are hardly conducive to A$ strength over a sustained period.

Staying with the Aussie, According to our residence Technical Analyst, Adam Taylor, a head and shoulders reversal appears to be developing on the GBPAUD which would lend itself to a medium term target of around 2.07. For the short term, however, the recent AUD strength is still contained within the overall uptrend, and until the BOE signals a rate rise, the pair could be prone to trading.

GBPAUD – Head and Shoulders – reversal on the horizon?