Higher Fed Rate Hike Bets Weigh on the Australian Dollar to US Dollar Exchange Rate
Investors have had little reason to buy the Australian Dollar (AUD) over the past week, and higher bets that the Federal Reserve will hike US interest rates multiple times in 2018 have pushed the Australian Dollar to US Dollar (AUD/USD) exchange rate lower.
AUD/USD has fallen from around 0.8113 to near a weekly low of 0.7991 this week.
On Wednesday, the Federal Reserve held its first 2018 monetary policy decision – and the final decision of outgoing Fed Chairwoman Janet Yellen.
The Fed did leave monetary policy frozen as expected, but notably expressed fresh confidence that US inflation would be stronger in the coming year. The Fed’s confidence on inflation boosted market Federal Reserve interest rate hike bets.
While the US Dollar (USD), still reeling from its multi-week selloff, didn’t massively benefit from the higher rate hike bets so far, it did make the currency more appealing versus the risky Australian Dollar.
The Fed indicated that an interest rate hike was on the table for March and markets are currency pricing in around three interest rate hikes throughout the year.
Australian Dollar (AUD) Exchange Rates See Additional Pressure Domestically
The Australian Dollar performed strongly against the US Dollar for most of January, but investors are growing anxious that the currency is running out of support and could be about to plunge.
Recent Australian wage data has been underwhelming and domestic inflation stats from recent sessions were disappointing too.
Australia’s Q4 inflation prints came in at 0.6% quarter-on-quarter and 1.9% year-on-year according to Wednesday’s report, which fell below economist forecasts of 0.7% and 2% respectively.
While Australia’s January manufacturing PMI beat expectations, December building permits also disappointed this week.
Some analysts are suggesting that price pressures in Australia are still much too low to support higher interest rates from the Reserve Bank of Australia (RBA) any time soon – with some even predicting that the bank could cut interest rates again before hiking.
US Dollar (USD) Exchange Rate Trade Little-Affected by US Data
Recent US data has been generally strong, but the US Dollar’s strength has been limited regardless as the currency is still reeling from a bearish selloff that lasted for most of January.
Thursday saw the publication of ISM’s US manufacturing PMI from January, which was forecast to slide from 59.7 to 58.8 but only slipped from a revised 59.3 to 59.1.
US construction spending and unit labour costs were both higher than expected too according to Thursday data.
However, as investors are anticipating key US Non-Farm Payroll data due for publication on Friday they have been hesitant to go all in on a big US Dollar recovery rally.
Australian Dollar to US Dollar (AUD/USD) Forecast: US Non-Farm Payroll Report Ahead
US Dollar investors may be awaiting Friday’s anticipated January US Non-Farm Payroll report before making any big moves on the currency, meaning AUD/USD could be in for another late-week fall if they impress.
Economists generally predict that the change in Non-Farm Payrolls figure will have hit around 180k in January, with the unemployment rate expected to remain at 4.1%.
Investors will also keep a close eye on wage growth, with yearly earnings expected to have picked up from 2.5% to 2.6%.
If the US job data beats expectations, it could make investors more eager to buy the oversold US Dollar back from its recent lows, which would drive AUD/USD even lower.
This could keep the Australian Dollar to US Dollar (AUD/USD) exchange rate falling next week too.
However, it’s possible that investors will remain hesitant to buy the US Dollar instead, amid political uncertainties. Either way though, AUD/USD is still on track to lose around a cent this week.
Australian Dollar trade could become even weaker next week too, if the Reserve Bank of Australia (RBA) reflects recent analyst concerns and hints that there is a chance of a rate cut on the horizon.
Australian retail sales and trade data from December could also influence the Australian Dollar to US Dollar (AUD/USD) exchange rate in the coming days.