Australian Dollar claws back minor gains after Fed meeting announcement

Australian Dollar weakens after inflation data but then claws back two tenths of a percent after the Fed meeting.
AUD/USD also recovered marginally after US New Home Sales regsitered a fall in June.
The FOMC decide d to raise the Fed Funds rate by 0.25% but apart from that kept wording the same as the June meeting.

The Australian Dollar (AUD) claws back some of the losses suffered against the US Dollar (USD), after the conclusion of the Federal Reserve Open Market Committee (FOMC) meeting on Wednesday. At the meeting Federal Reserve (Fed) officials decided to raise the target range for the Federal Funds Rate by 0.25% to 5.25-5.50% – as widely expected. Apart from that, the wording of the accompanying statement was the same as the June meeting suggesting neither a hawkish nor dovish tilt.

The Aussie experienced a sell-off overnight after the release of Australian inflation data surprised to the downside. This suggests a less hawkish Reserve Bank of Australia (RBA) going forward, and less aggressive interest rate hikes going forward. Lower interest rates means less capital inflows which tends to weigh on currencies.

The AUD/USD pair trades in the 0.67s during the US session.

Australian Dollar news and market movers

The Australian Dollar makes up some of the losses suffered after Aussie inflation data suprised to the downside, following the Fed meeting. The FOMC raised rates by 0.25% but apart from that the wording of the statement remained the same, suggesting neither a more hawkish nor dovish hike.
The Aussie is still down on the day however, after it dropped sharply overnight following the release of Australian Consumer Price Index (CPI) data for Q2, which showed a steeper-than-expected slowdown in inflation.
Australian CPI inflation came out at 6.0% in Q2 YoY when 6.2% had been forecast versus the 7.0% in Q1.
On a QoQ basis, CPI registered a 0.8% rise versus the 1.0% forecast by economists and 1.4% previous.
The Reserve Bank of Australia’s (RBA) preferred gauge, RBA Trimmed Mean CPI, measured quarterly, increased by 5.8% YoY in Q2 versus the 6.0% rise estimated and the 6.6% of Q1.
QoQ RBA Trimmed Mean CPI rose 1.0% versus the estimated 1.1% rise, but below the 1.3% rise in Q1.
Inventory data from the American Petroleum Institute (API) showed a rise in stockpiles suggesting lower demand and weighing on Oil, one of Australia’s key exports. This acts as a headwind for the Aussie.
NUS New Homes Sales in June come out at 0.679 million in June, below the 0.725M forecast and the 0.715M previously. The total decline is 2.5% compared to the 6.6% rise in May. The data suggests higher interest rates are dissuading house buyers from taking out mortgages, and if they persist could be a factor for the Fed to consider when assessing how long to keep interest rates high.
There exists a risk that the RBA will have to cut rates from their current 4.1% level in 2024 because the Australian house market is dominated by variable-rate mortgages so it is more sensitive to changes in interest rates, and homeowners have recently been adversely affected by higher mortgage interest repayments, according to Bloomberg Intelligence, as quoted by Financial Review.
The RBA’s Cash Rate is 4.1%, which is below the Fed’s 5.50%, overall favoring capital flows to the Greenback versus the Aussie.
China’s pledge to increase support for the economy has helped the Australian Dollar since it is Australia’s largest trading neighbor.

Australian Dollar technical analysis

AUD/USD is in a sideways trend on both the long and medium-term charts. The February 2023 high at 0.7158 is a key hurdle on the weekly chart, which if vaulted, will alter the outlook to one that is more bullish longer term.

Likewise, the 0.6458 low established in June is a key level for bears, which if breached decisively, would give the chart a more bearish overtone from a longer-term perspective.

Australian Dollar vs US Dollar: Weekly Chart

A confluence of support made up of all the major daily simple moving averages (50, 100 and 200) exists in the upper 0.66s and early 0.67s. This is expected to provide a rigid cordon of support, acting as a barrier to further losses.

The exchange rate has already bounced off the 200-day Simple Moving Average (SMA) at 0.6725 and completed a pivot higher. If Wednesday continues the bullish price action, that will add confirmation of a reversal of the downmove.

Australian Dollar vs US Dollar: Daily Chart

Despite the decline witnessed so far on Wednesday, there is potential for a recovery, given the underpinning support from the major MAs.

A decisive break above the June 16 high at 0.6900 would provide stronger confirmation of a more bullish outlook.

Likewise, a decisive break below the 50 and 100-day Simple Moving Averages (SMA) would confirm a continuation of the recent bear move lower to a speculative target at the June and July lows in the mid-0.64s.

A decisive break consists of a long daily candlestick, which pierces cleanly above or below the critical level in question and then closes near to the high or low of the day. It can also mean three up or down days in a row that break cleanly above or below the level, with the final day closing near its high or low and a decent distance away from the level.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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