Australian Dollar US Dollar (AUD/USD) Exchange Rate Pressured by Rising Fed Rate Hike Odds
As the Federal Open Market Committee (FOMC) meeting minutes proved more hawkish in tone than anticipated the Australian Dollar to US Dollar (AUD/USD) exchange rate came under renewed pressure.
Analysts at Nomura noted:
‘The FOMC minutes from the 30-31 January meeting were in line with our current expectations for four hikes in 2018, with the next hike at the upcoming March FOMC meeting. However, the minutes as well as developments since the January FOMC meeting point to an increased likelihood of a more hawkish tone in the March meeting. The minutes indicated that relative to forecasts submitted in December meeting, “a number of participants” revised up their near-term growth forecasts.’
With several policymakers reported to have raised their growth forecasts for the year ahead the odds of a faster pace of monetary tightening picked up, driving the US Dollar (USD) higher across the board.
Bets that the Fed could raise interest rates four times in 2018, rather than three as previously predicted, weighed heavily on market risk appetite as USD exchange rates extended their rally.
Although recent US data has proved rather mixed in nature this was not enough to dent the bullish mood of the US Dollar, with investors optimistic that the Fed is on course for a more aggressive pace of interest rate hikes.
Prospect of Greater Fed-RBA Policy Divergence Fails to Keep Australian Dollar (AUD) Down
Even so, the AUD/USD exchange rate was able to recover some of its losses during trade on Thursday as demand for the Australian Dollar (AUD) picked back up.
While the policy divergence between the Fed and the Reserve Bank of Australia (RBA) looks set to persist for some months to come this has failed to keep the antipodean currency on a weaker footing.
The downside potential of AUD exchange rates has been somewhat limited by the relative strength of global commodity prices, with markets confident that the strengthening Chinese economy will fuel further base metal demand in the near future.
However, in the absence of any fresh Australian data the AUD/USD exchange rate may well struggle to hold onto any positive momentum ahead of the weekend.
With the wider sense of market risk appetite limited, as the odds of more Fed interest rate hikes are priced in, the Australian Dollar still looks vulnerable to any significant shift in investor sentiment.
Solid Jobless Claims Data Forecast to Support US Dollar (USD) Exchange Rates
Tonight’s US jobless claims figures could provoke further volatility for the AUD/USD exchange rate, with continuing claims forecast to dip slightly on the weak.
Additional signs of tightening within the US labour market should offer further encouragement to Fed policymakers, helping to cement the prospect of a more aggressive tightening cycle.
On the other hand, if claims pick up this may be enough to dent demand for the US Dollar, pointing towards a lack of slack within the jobs market.
However, an uptick in January’s US leading index and further hawkish commentary from Fed officials may see the AUD/USD exchange rate losing ground once again in the near term.