Australian Dollar fails ahead of 0.7000 as hawkish Fed and Iran risks limit USD losses

Source Fxstreet
  • AUD/USD attracts some dip-buyers as softer US bond yields keep USD bulls on the defensive.
  • The Fed’s hawkish tilt and geopolitical uncertainties help limit losses for the safe-haven buck.
  • Traders also seem hesitant ahead of the US inflation figures and Fed Chair Warsh’s speech.

The AUD/USD pair struggles to capitalize on a modest Asian session uptick, trading below the 0.7000 psychological mark and below a nearly two-week high, touched earlier this Monday.

Against the backdrop of the recent minor pullback in US bond yields from multi-year highs, the US Dollar (USD) kicks off the new week on a weaker note amid hopes that the Russian-Ukraine energy peace deal will ease global fuel shortages, reducing inflationary fears. However, the US Federal Reserve's (Fed) hawkish tilt, along with tensions in the Middle East, helps limit losses for the safe-haven Greenback and caps gains for the AUD/USD pair.

Although market participants have been pricing out the probability of a rate hike at the late-October Fed meeting, expectations for a 25-basis-point (bps) increase in December remain firmly on the table. The bets were reaffirmed by September FOMC Minutes, released last Wednesday, which revealed that policymakers still view inflation as the dominant threat to macroeconomic stability and back the case for further policy tightening by the year-end.

From the Middle East, the Iran-backed Houthi group in Yemen escalated their campaign against Saudi Arabia, targeting Riyadh’s King Khalid International Airport with a mix of ballistic and cruise missiles, as well as drones over the weekend. Adding to this, US President Donald Trump raised the possibility of resuming attacks on Iran. This keeps the geopolitical risk premium in play, backing the case for the emergence of dip-buying around the safe-haven buck.

Traders might also refrain from placing aggressive directional bets and opt to wait for the release of the latest US inflation figures – the Producer Price Index (PPI) and the Consumer Price Index (CPI) on Wednesday and Thursday, respectively. This will be followed by Fed Chair Kevin Warsh's speech at the annual meetings of the IMF and World Bank in Bangkok on Friday, which will drive the USD and provide some meaningful impetus to the AUD/USD pair.

AUD/USD 4-hour chart

Chart Analysis AUD/USD

Technical Analysis

The AUD/USD pair struggles to find acceptance above the 23.6% Fibonacci retracement level and keeps a bearish near-term tone beneath the 100-period Simple Moving Average (SMA) on the 4-hour chart. This, in turn, suggests that rallies are likely to face supply while spot prices remain capped below this cluster. On the downside, the next notable structural support emerges at the Fibonacci anchor around 0.6902, where buyers would be expected to show more interest if the decline extends.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

US Dollar FAQs

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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