Australian Dollar ticks up from intra-week lows with all eyes on Fed minutes
- AUD/USD finds buyers at 0.7065 to bounce up to 0.7080, but remains bearish on the daily chart.
- The USD is losing some momentum as investors brace for the Fed's minutes.
- Risk aversion and lower wage growth figures in Australia have proved a heavy weight for the Aussie.
The Australian Dollar (AUD)has bounced up from intra-week lows against the US Dollar (USD) on Friday, although the daily chart remains negative. The AUD/USD pair struggles to regain a previous support area above 0.7080 at the time of writing, after finding support at the 0.7065 area earlier on the day.
The Greenback is giving away ground against major peers on Wednesday’s European session, as traders brace for the release of the minutes of July’s Federal Reserve (Fed) monetary policy meeting, aiming for further guidance on the bank’s near-term plans.
ING: Fed minutes are unlikely to pose significant support for the USD
Analysts at ING highlight that "the suspicion is that the 12-member FOMC is less hawkish than the participants whose projections delivered forecasts of a 9:9 split for a hike in the June set of Dot Plots." ING assesses that "a few hawkish references in tonight's minutes could nudge the dollar and short-dated rates a little firmer," but they do not expect the minutes to be "a game changer."
Instead, ING experts see that "another batch of CPI and jobs data, plus the end-of-month Jackson Hole symposium, will have a bigger say in whether the Federal Reserve hikes in September," reiterating that "our base case is that it does not, and the dollar softens a little."
Aussie struggles on risk aversion and low wage growth
The Aussie, on the other hand, remains weighed by the growing uncertainty surrounding the Middle East conflict and higher Oil prices. In Australia, the steady growth of the Q2 Wage Price Index has eased pressure on the Reserve Bank of Australia (RBA) to hike interest rates immediately, providing an additional bearish impulse to the Aussie
Against this background, Brown Brothers Harriman’s Elias Haddad notes that “RBA cash rate futures continue to imply 60% odds of one final 25bps hike by year end to 4.60%,” but argues that “the risk is skewed towards a more extended pause in the RBA tightening cycle because policy is already somewhat restrictive.” AUD dips, however, are likely to remain limited, as “Australia’s attractive carry alongside the country’s strategic exposure to commodities linked to energy, AI, and defense remain key AUD tailwinds,” says Haddad in a note.
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.
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