AUD/USD Exchange Rate Slips on Hawkish Optimism at the US Federal Reserve
The Australian Dollar US Dollar (AUD/USD) exchange rate slipped on Thursday, limited by notably hawkish comments from New York Fed President William Dudley and a disappointing contraction in Australian GDP.
Speaking at in São Paulo, Mr Dudley confirmed that ‘gradual’ rate hikes this year could mean 4, rather than 3.
This is notable in that it matches the terminology employed by Fed Chairman Jerome Powell during his Congressional testimony, a speech in which he confirmed the bank’s intentions for ‘gradual’ rate hikes this year on the back of a robust performance of the US economy.
Indeed, markets had already been anticipating a rate hike from the US Federal Reserve in March this year, with record-low unemployment levels, accelerating wage growth and higher-than-expected consumer price growth prompting many to expect a faster, more extensive run of monetary tightening measures this year.
This news shifted the market focus away from recent talk of trade tariffs and possible global trade wars temporarily, effectively giving the ‘Greenback’ sufficient room to rise against the majors and limiting the Australian Dollar.
Australian GDP Disappoints – Australian Dollar (AUD) Exchange Rates Tumble
Things aren’t looking too brilliant at the moment for the Australian Dollar, with last week’s rate decision from the Reserve Bank of Australia (RBA) highlighting poor private sector wage growth, sudden talk of a global trade war this week and now a disappointing contraction in GDP.
According to figures from the Australian Bureau of Statistics, year-on-year GDP in Australia dropped to 2.4% in Q4 2017, down from the previous period’s 2.9% and the market expectation of 2.5%.
The monthly figure similarly disappointed, falling from 0.7% to 0.4%, below the forecast of 0.5%.
AMP Capital Economist Shane Oliver said that this weaker economic growth could mean that the RBA’s forecast of hitting 3% in the short-term may not be reached.
‘Our view is that the Australian economy will strengthen somewhat in 2018 as business conditions are still very positive, which will work through the spare capacity in the economy and eventually lift inflation. But that process will take some time’.
Combined, this run of bad news has limited the Australian Dollar, particularly with other countries in the midst of monetary policy tightening measures.
Trump Tariffs and Trade War Talk – Australian Dollar US Dollar (AUD/USD) Exchange Rate Forecast
The Australian Dollar US Dollar (AUD/USD) exchange rate could see even more pressure in the coming weeks if trade tariffs move from talk to reality.
US President Donald Trump has since offered Canada and Mexico a 30-day exemption from the planned tariffs on steel and aluminium imports, though this is entirely dependent on progress being made in NAFTA talks.
For all other countries, it would appear that the tariffs are going ahead, with the US President expected to sign a proclamation as soon as Friday this week.
Both Beijing and Brussels have been spooked by this news, repeatedly threatening to enact retaliatory tariffs if the US opts to go down this route.
Many analysts are sceptical that they will act, however, with both the EU and China having sizable trade surpluses with America.
In this sense these nations have a lot more to lose in the event of a trade war, a sentiment that President Trump has reflected in multiple statements of confidence.
Nonetheless, if the tariffs are enacted then the markets could grow increasingly anxious, likely fleeing the US Dollar and indeed the Australian Dollar for safe haven currencies.