Australian Dollar gave up gains following Fed's decision
- The AUD/USD saw a decline after the release of the Federal Reserve's decision.
- The projection of higher interest rates seems to be favoring the USD.
- The US Treasury yields cleared some losses but remain down by more than 2%.
On Wednesday, the Australian Dollar (AUD) soared against the US Dollar (USD), up until the Federal Reserve (Fed) decision was announced, making the pair trim part of its daily gains and decline to 0.6660 from 0.6700. This shift was likely due to the Fed's decision to revise its interest rate outlook, indicating a more hawkish stance
On the Australian front, soft inflation data from China, a vital trading partner, is currently being evaluated by Australian traders. The Chinese inflation figures could influence the monetary policy of the Reserve Bank of Australia (RBA) and the performance of the Australian dollar as economic weakness in China might prompt sooner rate cuts.
Daily digest market movers: Australian Dollar retreats as markets digest Fed’s decision
- The US Dollar reacted to the Federal Reserve's decision, which ultimately affected the AUD/USD pair's gains.
- The federal funds rate to forecasts were revised to 5.1% by the end of 2024 suggesting that the members of the Federal Open Market Committee (FOMC) expect fewer rate cuts this year.
- Meanwhile, Chair Powell reiterated the Federal Reserve's focus on the labor market, noting a strong but gradually cooling trend.
- He noted that if unemployment rises unexpectedly, the Fed is ready to respond.
- His tone suggested that the decisions would be decided meeting by meeting but that it might take longer to start cutting.
- Ahead of the Asian session, Australian unemployment figures will be closely looked upon.
Technical Analysis: AUD/USD bulls lose some traction, momentum remains
The Relative Strength Index (RSI) has ascended above the 50 level which supports the bullish sentiment, while the Moving Average Convergence Divergence (MACD) presents shrinking red bars reflecting a diminishing selling pressure.
The overall positive outlook remains intact as the pair continues to stay above the 100 and 200-day Simple Moving Averages (SMA) around 0.6550. This position above these key levels suggests an overall favorable trend. Furthermore, the bulls took over the 20-day SMA on Wednesday, leading to a brightened short-term outlook.
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.