Federal Reserve Chairman Powell Impresses Leaving Australian Dollar to US Dollar Exchange Rate Weaker
Tuesday saw new Federal Reserve Chairman Jerome Powell hold the first Congressional Testimony of his tenure, and as a result the Australian Dollar to US Dollar (AUD/USD) exchange rate slipped below the week’s opening levels.
Last week’s US Dollar (USD) recovery pushed AUD/USD down from 0.7920 to 0.7843, but the pair could see further losses in the coming days if Australian Dollar (AUD) demand does not improve. AUD/USD trended near 0.7810 during Tuesday’s American session.
Following uncertainty about what tone the Federal Reserve could take under its new Chairman, after Janet Yellen’s tenure ended at the beginning of February, Powell’s testimony was seen as reassuring for markets.
Among his comments, Powell stated;
‘Against this backdrop of solid growth and a strong labor market, inflation has been low and stable. In fact, inflation has continued to run below the 2% that the FOMC judges to be most consistent over the longer run with our congressional mandate.’
As economists predicted and hoped, Powell’s stance was largely consistent with that of his predecessor, Janet Yellen.
His tone was cautious and was neither too hawkish nor dovish, essentially helping markets to be confident that the Fed would continue to see consistent monetary policy.
Analysts and markets are now also confident that the Federal Reserve could hike US interest rates around three times in 2018, with some economists suggesting that Powell hinted even four interest rate hikes were possible.
James Knightley from ING Bank stated;
‘At the moment the Fed are projecting three rate hikes this year while financial markets are currently pricing in around 80bp of rate hikes. Given our above consensus 3% GDP growth forecast for 2018 and the potential for inflation to rise more quickly than many in the market anticipate (wages, dollar weakness, medical care costs, cell phone data distortions, commodity prices), we are now forecasting four rate rises this year. We look for one every quarter – starting with the March 21 FOMC meeting.’
Australian Dollar (AUD) Slumps as Risk-Sentiment Weakens
With new Fed Chairman Jerome Powell bolstering market confidence that the Fed will remain consistent under his tenure, interest rate hike bets are rising and the US Dollar is becoming more appealing.
In these circumstances with the US economic outlook strong, investors are more hesitant to take risks. As a result, the risky Australian Dollar has been unappealing to forex traders.
Economists predict that commodity news could increasingly drive Australian Dollar movement in 2018.
However, while iron ore is Australia’s biggest commodity export, news that iron ore prices had hit their best levels since April 2017 only gave the ‘Aussie’ limited support due to the strength of the US Dollar.
Australian data has also failed to support Australian Dollar trade, but data due in the coming days could make the ‘Aussie’ more appealing again.
Australian Dollar to US Dollar (AUD/USD) Forecast: US Growth Projections in Focus
As markets are now relieved and confident in the direction of the Federal Reserve under new Chairman Jerome Powell, optimistic US economic news could make the US Dollar even more appealing and could push AUD/USD lower towards the end of the week.
So while Wednesday’s Australian home sales and private sector credit results could influence the Australian Dollar slightly, AUD/USD traders are more likely to await vital US data due in the American session before making major moves on the pair.
Wednesday’s American session will see the publication of the second US Gross Domestic Product (GDP) projections for Q4 2017.
US growth is forecast to have slowed from 3.2% to 2.5% quarter-on-quarter. US pending home sales may influence movement too.
Thursday data could also influence the Australian Dollar to US Dollar (AUD/USD) exchange rate, as Australia’s February manufacturing PMI will be published and US Public Consumption Expenditure (PCE) data will come in during the American session.