- AUD/USD regains ground ahead of FOMC, while the USD consolidates losses.
- Chinese data concerns weigh on the AUD.
- Hawkish RBA keeps the Aussie afloat on Tuesday.
The AUD/USD has regained ground in Tuesday's session and has attracted some follow-through buyers, climbing to a nearly two-week high of 0.6755. The Australian Dollar is feeling the effect of consolidating losses by the US Dollar, as well as concerns about economic data coming from China. Furthermore, a positive risk tone has undermined the USD, adding to the AUD/USD's gains.
Due to conflicting economic signals and the Reserve Bank of Australia's (RBA) strict stance on inflation, the market's expectations for interest rate cuts have been scaled back. Market watchers now anticipate only a modest 25-basis-point reduction in 2024, reflecting a more cautious outlook on the Australian economy.
On Tuesday, the US released Retail Sales data from August that didn’t impact the USD but did surpass expectations as the focus is set on Wednesday’s Fed decision.
Daily digest market movers: Australian Dollar steady ahead of Fed
- US Dollar consolidates recent losses on bets for a 50 bps rate cut by the Fed.
- RBA’s hawkish outlook supports the risk-sensitive Australian Dollar.
- Fundamental backdrop favors the AUD, but concerns about China's economic slowdown could act as a headwind.
- Soft Retail Sales data from the US had little market reaction though US data may be limited as focus remains on Fed interest rate decision come Wednesday.
- Fed is expected to cut interest rates by 25 bps, according to analysts, but a 50 bps cut remains more likely, according to CME FedWatch Tool.
- A smaller-than-expected rate cut could boost the US Dollar and weigh on the AUD.
- A dovish Fed stance could benefit the AUD, while a hawkish stance could bolster the USD.
AUD/USD technical outlook: Pair extends gains on US Dollar weakness
The AUD/USD pair extended gains for the second consecutive day, marking a week-long uptrend. Early during the European session, the Ausie reached its highest point in a week, hovering above the mid-0.6700s.
Indicators are promising, and if the pair holds above the 20-day Simple Moving Average (SMA), the outlook will turn positive.
Fed FAQs
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.
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.
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.
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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