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Australian Dollar Eyes Greece, Yellen Testimony for Direction Cues

Australian Dollar Eyes Greece, Yellen Testimony for Direction Cues

Fundamental Forecast for the Australian Dollar: Neutral

  • Australian Dollar at the Mercy of Risk Sentiment Trends Once Again
  • Greece Debt Deal Talks, Fed Rate Hike Bets Remain in the Spotlight
  • Find Key Turning Points for the Australian Dollar with DailyFX SSI

The domestic economic calendar turns quiet in the week ahead, putting the Australian Dollar at the mercy of external forces. Familiar themes continue to dominate attention, with traders focused on negotiations between Greece and its creditors as well as the outlook for Fed monetary policy. High-profile event risk looms on both fronts, hinting the Aussie is set for a volatile five-day stretch ahead.

On the Greek front, a faint glimmer of hope emerged on Friday as Athens requested a new €53.5 billion bailout from the Eurozone’s ESM rescue fund. Prime Minister Alexis Tsipras and company also submitted a set of proposed reforms that appeared similar to those previously championed by the country’s creditors. This fueled speculation that a last-ditch accord may yet emerge at an EU-wide summit on Sunday. A breakthrough is likely to boost market-wide risk appetite and boost the risk-geared Australian unit while another failure stands to yield the opposite result.

Turning to the Fed traders will be all ears as Chair Janet Yellen delivers her semi-annual testimony to the US Congress. A slew of economic data releases headlined by June’s Retail Sales and CPI figures will offer a backdrop. At its latest meeting in June, officials flattened their expected tightening trajectory (compared with the March assessment) but continued to call for two rate hikes in 2015. This stands in stark contrast with the markets’ priced-in outlook, which increasingly favors the Fed waiting until early 2016 to resume policy normalization.

The situation echoes a similar one last year, when a dovish shift in investors’ bets following a soft first quarter was disappointed as the FOMC steadily tapered QE3 asset purchases ended the program on schedule. Risk aversion is likely if Yellen hints ata parallel scenario this time around, warning that stimulus withdrawal may be closer than are investors hoping for.

This ought to be particularly pronounced the Fed Chair downplays likely knock-on effects from external headwinds (including the Greek crisis and recent Chinese financial market volatility). Furthermore, US economic data has increasingly outperformed relative to expectations in recent weeks, hinting data flow may reinforce commentary perceived as leaning hawkish. Needless to say, such a scenario bodes ill for the Aussie.