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- Australian Dollar clears gains on USD recovery
Australian Dollar clears gains on USD recovery
- AUD/USD fell as the US Dollar recovered following Powell’s words.
- The Fed reduced rates by 50 bps to 5%.
- Federal policymakers foresee lower GDP development, higher unemployment, and easing inflation in the coming years.
The AUD/USD reached a high of 0.6800 before falling back toward the 0.6760 level in the wake of the Federal Reserve's (Fed) decision to cut interest rates by 50 basis points to 5%. Fed Chair Jerome Powell’s cautious words seem to have made the USD clear most of its daily losses.
On the Aussie’s front, the Australian economy faces an uncertain future with mixed signals from various economic indicators. Despite high inflation, the Reserve Bank of Australia (RBA) has maintained a hawkish stance, indicating a commitment to combating inflation through interest rate increases. As a result, markets now anticipate only a modest easing of monetary policy in 2024, with a potential rate cut of just 0.25%.
Daily digest market movers: Australian Dollar clears gains as markets digest Powell’s words
- The Australian Dollar cleared gains against the US Dollar following the 50 basis point rate cut by the Fed.
- The Fed lowered its GDP growth projection for 2024 to 2%, down from 2.1% previously and increased its Unemployment Rate forecast for 2024 and 2025 to 4.4%, up from 4.2%.
- Inflation expectations eased, with PCE inflation forecast to reach 2.3% by the end of 2024, down from the previous estimate of 2.6%, while core inflation is expected to settle at 2.6%.
- The Fed cut rates by 50 basis points to a range of 4.75-5.00% in an effort to balance economic conditions.
- Fed Chair Powell stated that the rate cut was not a signal of a new pace of reductions and that the Fed had been patient and is moving at an appropriate pace.
AUD/USD technical outlook: Pair rejected above 0.6800 resistance
The AUD/USD climbed significantly, approaching 0.6800 after the Fed's surprising decision. After cleaning all of its daily gains indicators flattened somewhat, but the overall outlook remains positive. For that to remain, the bulls must defend the 20-day Simple Moving Average (SMA) at 0.6730.
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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