AUD/USD trades flat near 0.7000 as markets await Fed decision
- AUD/USD trades sideways near multi-year highs ahead of the Fed interest rate decision.
- The Fed is expected to keep rates unchanged, with attention on Powell’s guidance.
- Hot CPI data strengthens the case for a potential RBA rate hike, offering underlying support to the Aussie.
The Australian Dollar (AUD) is trading sideways against the US Dollar (USD) on Wednesday, as the Greenback finds some footing ahead of the Federal Reserve’s interest rate decision due at 19:00 GMT. At the time of writing, AUD/USD trades near 0.7000, holding near its highest level since February 2023.
The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 96.25, stabilizing after hitting a four-year low of 95.56 on Tuesday.
Markets are fully pricing in the Fed to keep interest rates unchanged at the 3.50%–3.75% range, following three consecutive 25-basis-point rate cuts delivered last year. At the December meeting, Fed Chair Jerome Powell reiterated that the central bank is "well-positioned to wait and see how the economy evolves."
Since the last Fed meeting, US data have strengthened the view that the central bank can afford to remain patient, with inflation easing only gradually and labour market conditions remaining broadly resilient.
While no change in rates is expected, attention will be firmly on Fed Chair Jerome Powell’s post-meeting press conference for guidance on the monetary policy outlook, with markets still anticipating two rate cuts later this year. Signals of a prolonged pause could lift the US Dollar and pressure the Aussie, while any tilt toward gradual easing would likely support AUD/USD.
In Australia, the hotter-than-expected inflation data reinforced market bets that the Reserve Bank of Australia’s (RBA) next move could be a rate hike. Headline Consumer Price Index (CPI) rose 1.0% MoM in December, rebounding from flat growth in November and beating forecasts of a 0.7% increase. On a yearly basis, inflation accelerated to 3.8% from 3.4%, coming in above expectations of 3.6%.
Trimmed mean CPI rose 0.2% MoM in December, matching forecasts but easing from November’s 0.3% increase. On a yearly basis, core inflation edged up to 3.3% from 3.2%, remaining above the RBA’s 2-3% target band.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Recommended Articles
