Hawkish Federal Reserve and risk off bias drive AUD lower

Daily Currency Update

The Australian dollar retreated through trade on Friday amid hawkish Federal Reserve rhetoric and a risk off bias. Having tested a break above 0.72 in the wake of Wednesday’s FOMC policy update, the AUD opens this morning buying 0.7125 US cents, giving up the majority of gains and shifting back within a narrow trading band. News the Netherlands and the UK will reintroduce Covid lockdown restrictions as Omicron takes hold and spreads at an exponential rate, have fostered new fears the latest variant will derail the global economic recovery. Risk assets took another hit following comments from FOMC member Christopher Waller, wherein Waller suggested the Fed would consider hiking rates as early as March, while San Francisco Fed president Daly confirmed at least 2 to 3 hikes would be necessary next year if the Bank was to control inflation. This accelerates the markets timeline of expectation, adding upward pressure on 2-year rate bond rates and helped to drive USD gains into the weekend. With price action subdued and few macroeconomic indicators on hand to drive direction, we expect ranges will be largely contained leading into the holiday season. Fluctuations in the risk narrative and the ever-present threat posed by omicron are likely to be the source of any significant shift in direction.