Australian Dollar US Dollar (AUD/USD) Exchange Rate Pressured By Rising Fed Rate Hike Odds
Although the Australian manufacturing PMI showed another solid month of sector expansion in January this was unable to prevent the Australian Dollar to US Dollar (AUD/USD) exchange rate from slumping.
Given the mixed nature of recent signs from the Australian economy investors remain reluctant to favour the Australian Dollar (AUD), especially as wider concerns over the global trade outlook remain.
The AUD/USD exchange rate came under further pressure as a result of the Federal Open Market Committee (FOMC) policy meeting, which yielded a more hawkish message than anticipated.
As policymakers adopted a relatively optimistic tone on inflation this boosted bets that interest rates will rise more aggressively over the course of 2018, boosting the US Dollar (USD).
A sharp, unexpected contraction in Australian building approvals also weighed on AUD exchange rates during trade on Thursday.
Solid US Payrolls Report Forecast to Boost US Dollar and Fed Bets
Bets over the prospect of an imminent Fed interest rate hike are likely to keep the AUD/USD exchange rate under pressure over the coming days.
Another strong showing from the US non-farm payrolls report could see USD extending its gains further heading into the weekend, with investors likely to greet signs of continued tightening within the labour market.
Even so, any underperformance in domestic data could see the US Dollar trending lower as confidence in the economic outlook eases.
As James Knightley, Chief International Economist at ING, noted:
‘Like the Fed itself, we are forecasting three 25bp interest rate increases this year. However, the potential for another, more damaging, government shutdown, the likelihood core CPI will remain below 2% until after the March FOMC meeting and the possibility that bad weather could hurt activity data mean we are not currently forecasting a 21 March hike. However, should these threats subside we will likely have to change that – probably inserting it as a fourth hike rather than just shifting forward the three 2018 moves we are currently predicting.’
Rising Australian Producer Prices May Rally AUD/USD Exchange Rate
Some support could still be in store for the AUD/USD exchange rate in the near term, providing the fourth quarter Australian producer price index figures impress.
Any uptick in price pressures could counteract some of the lingering bearish impact of the fourth quarter consumer price index, suggesting that inflation is still building within the Australian economy.
While even a strong showing here would not be enough to materially alter the outlook of the Reserve Bank of Australia (RBA) this could still offer a boost to AUD exchange rates.
On the other hand, if the data fails to point towards an increase in inflation this could see the Australian Dollar shedding further ground against its rivals.
Wider market risk sentiment looks set to remain a key headwind for the AUD/USD exchange rate, unless investors see cause for greater optimism in the global outlook.