AUD/USD Gains Ground Ahead of Fed Decision Amid RBA Caution

AUD/USD Gains Ground Ahead of Fed Decision Amid RBA Caution


The AUD/USD currency pair continues to trade with an upward bias, reaching around 0.6460 during the European session on Wednesday. The pair's recent gains can be attributed to market caution ahead of the highly anticipated interest rate decision by the US Federal Reserve (Fed). In this article, we examine the key factors influencing the AUD/USD exchange rate, including the Reserve Bank of Australia's (RBA) monetary policy stance and the potential impact of the Fed's decision.

RBA's Monetary Policy Deliberations

The RBA recently released the minutes of its September monetary policy meeting, shedding light on the central bank's discussions. Notably, the RBA contemplated the possibility of a 25 basis point interest rate hike during the meeting. However, the decision ultimately favored maintaining the current interest rate, driven by the observation that recent economic data had not significantly altered the economic outlook.

Despite the decision to hold rates steady, the RBA made it clear that it stands ready to take further measures to tighten monetary policy if inflation proves to be more persistent than initially anticipated. While this readiness underscores the central bank's commitment to controlling inflation, the absence of new hawkish signals in the minutes may temper the Australian Dollar's (AUD) strength relative to the US Dollar (USD).

China's Impact on Market Sentiment

The People's Bank of China (PBoC) decided to keep its benchmark lending rates unchanged, aligning with market expectations. The one-year Loan Prime Rate (LPR) remains at 3.45%, while the five-year LPR holds steady at 4.20%. Additionally, China's National Development and Reform Commission (NDRC) acknowledged the economic challenges faced by the country but expressed confidence in the effectiveness of domestic macro-control policies. This sentiment from key Chinese officials can influence investor sentiment in the Asia-Pacific region, including the AUD.

US Dollar and Interest Rate Expectations

The US Dollar Index (DXY), measuring the USD against major currencies, is trading lower near 105.10 as investors anticipate the Fed's decision. Market consensus suggests that the Fed will maintain its current interest rates but will provide further guidance on its future monetary policy stance.

Markets have already priced in the possibility of a 25 basis point rate hike by year-end, driven by strong US macroeconomic data and persistent inflation pressures. The robust US economic outlook has led to higher US Treasury bond yields, supporting the USD and posing challenges for the AUD/USD currency pair. The US 10-year Treasury yield remains relatively high at 4.35%.

Market Focus on Fed Guidance

As investors await the Fed's decision, their attention is primarily on the central bank's future rate hike plans. Market sentiment indicates that the Fed is inclined to maintain higher policy rates for an extended period. Therefore, the focus will shift to the accompanying monetary policy statement and remarks by Fed Chair Jerome Powell during the post-meeting press conference.

Conclusion

The AUD/USD currency pair's recent gains reflect the cautious sentiment prevailing in the market ahead of the Fed's interest rate decision. The RBA's readiness to tighten policy if needed and China's economic stance add layers of complexity to the currency pair's dynamics. The direction of the AUD/USD exchange rate will largely depend on the Fed's guidance, making Jerome Powell's statements a key factor in shaping short-term market sentiment.

Our preference

Long positions above 0.6440 with targets at 0.6490 & 0.6510 in extension.

Trade closed: target reached:

Trade closed: target reached:

DONE