Australian Dollar Pauses as US Dollar Sinks on a Dovish Fed. Will AUD/USD Reverse?

Australian Dollar, AUD/USD, US Dollar, Fed, Daly, RBA, KOSPI, Tudor Jones, NZD/USD – Talking Points

• The Australian Dollar eased as markets weighed RBA and Fed comments
• Fed hikes seem to have been iced for now, but conditions appear likely to remain tight
• If the US Dollar turns around, will AUD/USD resume its downtrend?

The Australian Dollar pondered the recent rally today after more indications that the Federal Reserve has hit the wait-and-see button while the RBA is contemplating the consequences of its rate hike cycle.

The situation in the Middle East continues to prompt markets to assess the risks associated with the potential impacts across asset classes.

Crude oil has been steadying so far on Wednesday with the WTI futures contract holding above US$ 86 bbl while the Brent contract is near US$ 88 bbl.

After the North American close, San Francisco Fed President Mary Daly maintained the mantra that had been articulated by other Fed board members this week. That is higher back-end bond yields in Treasuries might be doing the tightening work for the Fed.

It appears that the bank is signalling for a pause at its meeting at the end of this month and potentially further afield. Interest rate markets are ascribing only a low probability of a hike.

While the change in tack is less hawkish, there is not anything in the language so far to suggest any easing in monetary conditions is forthcoming.

Ms Daly was also open to the suggestion that the so-called ‘neutral rate’ for the Fed might be higher than the 2.5% previously widely perceived to be the case.

However she made it clear that the current Fed funds policy rate of 5.25 – 5.50% is a restrictive stance to deal with high inflation and is well above the theoretical neutral rate.

In regard to a soft landing for the US economy, Minneapolis Federal Reserve President Neel Kashkari opined that “It is looking more favourable.”

Wall Street finished its cash session higher and APAC equities have followed the lead with a sea of green across the region with South Korea’s KOSPI index leading the way, adding more than 2.5%.

Treasury yields are little changed so far with the 2-year note near 5% while the 10-year is around 4.65% and spot gold is settling near US$ 1,860 at the time of going to print.

On the flipside of the rosy outlook, famed investor Paul Tudor Jones said that the geopolitical environment is the worst that he has seen. He also sees a recession in the US in 2024 and said that the US is in its weakest financial position since World War II.

Elsewhere, the Reserve Bank of Australia (RBA) Assistant Governor Chris Kent made comments today highlighting the problems around the time lags in the transmission effect of monetary policy.

He also said, “Some further tightening may be required to ensure that inflation, that is still too high, returns to target.”

AUD/USD was slightly softer in the aftermath and NZD/USD also went lower today ahead of a national election in New Zealand this weekend.

Looking ahead, after the German CPI figure, the US will see PPI data.

The full economic calendar can be viewed here.

AUD/USD TECHNICAL ANALYSIS SNAPSHOT

AUD/USD rejected a move below a descending trendline last week but overall remains in a descending trend channel. To learn more about trend trading, click on the banner below.

It briefly traded above a historical breakpoint of 0.6387 on Friday but was unable to sustain the move and it may continue to offer resistance.

The 0.6500 – 0.6520 area contains a series of prior peaks and might be a notable resistance zone. Further up, the 0.6600 – 0.6620 area might be another resistance zone with several breakpoints and previous highs there.

On the downside, support may lie near the previous lows of 0.6285, 0.6270 and 0.6170.

The latter might also be supported at 161.8% Fibonacci Extension level at 0.6186. To learn more about Fibonacci techniques, click on the banner below.

Chart created in TradingView

— Written by Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel via @DanMcCarthyFX on Twitter