Australian Dollar to US Dollar Exchange Rate Plunges Following Reserve Bank of Australia Decision
Continued market expectations for higher interest rates in the US and flat interest rates in Australia have left the Australian Dollar to US Dollar (AUD/USD) exchange rate tumbling so far this week.
It looks like AUD/USD may be in track for another week of major losses. Last week saw AUD/USD fall from 0.7669 to 0.7581 and so far this week the pair has slumped to a low of 0.7479 – its worst level since June 2017.
On top of general expectations that the US economy will continue to strengthen and US interest rates will rise, AUD/USD became unappealing following an uneventful May policy decision from the Reserve Bank of Australia (RBA).
The bank left monetary policy frozen in its policy decision on Tuesday and its tone regarding the economic outlook was largely unchanged too. Investors hoping for any signs of change from the bank were disappointed.
Australian Dollar (AUD) Exchange Rate Sold as Australian Interest Rates Expected to Stay Frozen
Following mixed Australian inflation data, the Reserve Bank of Australia (RBA) has had no reason to change its stance on Australia’s monetary policy outlook.
Analysts increasingly expect the bank will leave monetary policy completely frozen for at least another year, meaning initial bets for a 2018 interest rate hike from the RBA have largely faded.
According to Ben Jarman from JPMorgan:
‘The hallmarks of today’s commentary is around growth to pick up from here,
We’ve not been expecting any huge changes in their forecasts. It might be on the margins, if at all. All things considered, the narrative is not a lot different this time compared to their previous forecast.’
On top of disappointment that the central bank outlook is unlikely to change in the short to mid-term, Australia’s manufacturing PMI from AiG fell more than expected in April. The figure slipped from an impressive 63.1 to 58.3.
Low risk-sentiment also weighed on Australian Dollar (AUD) trade. With the US Dollar (USD) broadly stronger recently, risky currencies like the Australian Dollar have been less appealing.
US Dollar (USD) Exchange Rates Firms Ahead of Federal Reserve Decision
Demand for the US Dollar has been strengthening over recent weeks on expectations that US inflation will firm and US interest rates will continue to rise.
Rising expectations for the US economy have been reflected in strong performance in US Treasury 10-year bond yields, which have tested levels over 3%.
Of course, rising economic expectations have been supported by US ecostats too.
Tuesday’s American session saw the publication of US manufacturing PMIs from April.
While ISM’s key print fell short of forecasts, it was still an impressive result of 57.3. Markit’s final April manufacturing PMI beat projections with a result of 56.5.
Australian Dollar to US Dollar (AUD/USD) Forecast: Federal Reserve Decision in Focus
The Australian Dollar to US Dollar (AUD/USD) exchange rate is unlikely to recover in the coming days unless the Federal Reserve is surprisingly dovish or upcoming US data is disappointing.
The Federal Reserve will hold its May policy decision during Wednesday’s American session and is not expected to make any changes to monetary policy.
However, markets increasingly expect that the Fed will ramp up its plans for 2018 interest rate hikes from three to four.
If the Fed does signal that there will be four rate hikes total this year, the US Dollar’s recent rally could continue and push AUD/USD even lower.
Another week of strong US Dollar trade would be rounded off if Friday’s US Non-Farm Payroll report also comes in strongly.
As for the Australian Dollar, Australian services data and trade balance data could boost the ‘Aussie’ if they impress. Otherwise though, resilient strength in the US Dollar is likely to keep AUD/USD under pressure.