AUD steady as all eyes turn to the Federal Reserve
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Daily Currency Update
The Australian dollar tracked within a narrow range on Tuesday as markets cast an eye to tonight’s all-important Federal Reserve policy meeting. With little of note on the domestic ticket, the AUD bounced between US$0.6740 and US$0.6770 throughout the local session and held the range through overnight trade. US retail sales printed largely in line with expectations and afforded investors little by way of final guidance as to the size of the Fed’s first rate cut. Markets are pricing 42 basis points of easing which suggests a 70% probability of a 50-point rate cut yet there is still a great deal of uncertainty as to whether the Fed will choose to front-load rate adjustments or ease into loosening monetary policy. Tonight’s decision and the guidance surrounding future rate adjustments will prove key in shaping near-term AUD value. A larger cut should help the AUD punch through resistance at US$0.68 while a more measured approach could lend the USD some near-term support. Of concern too is the possibility of another risk-off move on JPY carry trade unwinding. While the JPY has given back gains overnight a reduction in US rates may prompt a further run on carry trade bets potentially hampering any AUD extension. All in we expect plenty of action coming out of the Fed meeting and the only guarantee is volatility.Key Movers
The US dollar index edged higher Tuesday, breaking a four-day stretch of small declines as the JPY and GBP both gave up ground. While most eyes are now on the Fed and tonight’s all-important fed policy meeting the GBP gave up 0.4% sliding back below US$1.32 to mark intraday lows only marginally above US$1.3150. While there is no obvious catalyst for the GBP correction there is a growing belief the market is too optimistic about the outlook for the UK economy and with the pound rallying over recent weeks as we move toward the first Fed rate cut an opportunity arose to short the GBP and capitalise on recent gains. The yen was the day’s other notable underperformer suffering a sharp correction and giving up 1.1% allowing the USD to climb back above ¥142 as US treasury yields moved modestly higher.All eyes now turn to the Fed. While it is universally expected the Fed will cut rates, the size of the cut is still a point of contention. Most economists believe a 25-point cut is likely but pricing for a larger 50-point adjustment has gathered momentum through the last 4 days. The size of rate adjustment and guidance afforded by the Fed as to the timing and trajectory of future cuts will prove key in shaping direction across major currencies.
Expected Ranges
- AUD/USD: 0.6430 - 0.6900 ▲
- AUD/EUR: 0.6000 - 0.6150 ▲
- GBP/AUD: 1.9250 - 1.9550 ▼
- AUD/NZD: 1.0850 - 1.0950 ▲
- AUD/CAD: 0.9120 - 0.9220 ▲