Australian Dollar pulls back from one-week top as USD stays firm ahead of FOMC Minutes

AUD/USD drifts lower on Wednesday, snapping a three-day winning streak to a one-week top.
Geopolitical risks and elevated US bond yields revive USD demand, weighing on spot prices.
Receding RBA rate hike bets favor bears as the market focus remains on the FOMC Minutes.

The AUD/USD pair attracts some sellers on Wednesday, stalling a three-day recovery move from the 0.6900 neighborhood, or a three-month low, touched last week. Spot prices trade around the 0.6970-0.6965 region during the early European session amid a broadly firmer US Dollar (USD) as the focus remains glued to the FOMC Minutes.

Análisis de TMGM: noticias de mercados financieros, calendario económico e información del mercado

Investors will look for more cues about the US Federal Reserve's (Fed) policy path as signs of moderating inflationary pressures and a cooling labor market tempered bets for an October rate hike. Meanwhile, the outlook would play a key role in influencing the near-term USD price dynamics. In the meantime, a combination of factors helps revive demand for the Greenback, which, in turn, is seen exerting some downward pressure on the AUD/USD pair.

The CME Group's FedWatch Tool indicates that traders are still pricing in around an 85% chance that the US central bank will raise borrowing costs by the end of this year. Furthermore, crude oil prices hold above a one-month low amid persistent geopolitical uncertainties, energy-driven inflation fears, and keeping US bond yields elevated near multi-year highs. This lends additional support to the safe-haven buck and backs the case for deeper AUD/USD losses.

Meanwhile, traders have sharply pared back bets on further policy tightening by the Reserve Bank of Australia (RBA) in the wake of softer inflation data and Governor Michele Bullock's less hawkish comments following the September rate hike. This further contributes to the offered tone surrounding the Australian Dollar (AUD). Moreover, the overnight failure ahead of the 0.7000 psychological mark validates the negative outlook for the AUD/USD pair.

AUD underperforms as softer Australia CPI print weighs on RBA expectations

Strategists at Brown Brothers Harriman highlight that the Aussie is lagging peers, noting that “AUD is underperforming after the softer monthly rise in Australia’s CPI weighed on RBA cash rate futures.” They point out that the latest inflation data undershot expectations, with “headline CPI rose 0.4% (consensus: 0.5%) to be up 4.0% y/y (consensus: 4.1%, prior: 3.5%), while trimmed mean CPI increased 0.2% m/m (consensus: 0.3%) to remain at 3.6% y/y for a third straight month.” This softer-than-forecast profile is seen as tempering market conviction around further RBA tightening and leaving the AUD on the back foot in the near term.

AUD/USD 4-hour chart

Technical Analysis

The AUD/USD pair keeps a bearish near-term bias beneath the 100-period Simple Moving Average (SMA) on the 4-hour chart and a dense Fibonacci retracement band overhead. Immediate resistance aligns at the 23.6% Fibo. retracement at 0.6983, followed by a broader cluster between the 38.2% retracement at 0.7032 and the 100-period SMA at 0.7039, which would need to be reclaimed to ease downside pressure. On the downside, initial support is located at the structural floor at 0.6905, where a break lower would reinforce the bearish tone and expose deeper losses in the coming sessions.

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

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

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.

How often does the Fed hold monetary policy meetings?

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.

What is Quantitative Easing (QE) and how does it impact USD?

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.

What is Quantitative Tightening (QT) and how does it impact 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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