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Australian Dollar May Fall Further on Hawkish FOMC Guidance

Australian Dollar May Fall Further on Hawkish FOMC Guidance

Ilya Spivak,

Fundamental Forecast for the Australian Dollar: Bearish

  • Australian Dollar at the mercy of risk trends, relative yields outlook
  • Lull in domestic event risk puts FOMC rate decision in the spotlight
  • Hawkish Fed posture threatens third week of Aussie Dollar lossess

Are retail traders buying or selling AUD/USD before the Fed rate decision? Find out here.

The Australian Dollar faces another difficult week ahead as all eyes turn to FOMC monetary policy announcement. The currency’s sensitivity to risk sentiment trends and relative yield spreads suggests whatever outcome crosses the wires, it is likely to generate ample Aussie volatility. The markets price in the probability of a rate hike at just 20 percent, suggesting few traders will be surprised if central bank officials opt for the status quo. The spotlight will be on the updated set of economic and rate-path forecasts as well as a press conference with Fed Chair Janet Yellen.

While US economic data has mostly underperformed relative to consensus forecasts since late July, decidedly hawkish comments from Yellen and Fed Vice Chair Fischer set off speculation of imminent tightening. This sense has been reinforced by saber-rattling from most other policymakers that have opined since. Investors will look for guidance that reconciles this disparity. Augusts’ stronger-than-expected inflation reading and nonfarm payrolls growth averaging above the 190k cited by Ms Yellen as supportive of a hike certainly help. However, explicitly singling out these developments as formative may be needed to guide market expectations through the fog of conflicting news-flow.

Although Fed officials have claimed that every policy meeting may produce a rate hike, their clear desire not to trigger market panic suggests that they will not opt to change things without an opportunity to thoroughly explain in detail. This means that after this week’s outing, the next opportunity for stimulus withdrawal comes in December. Between now and then, another opportunity to update traders will come in November, offering the FOMC a chance to up- or down-shift the projected rate hike path and limit surprise risk. Keeping this flexibility will mean that the narrative emerging from the upcoming announcement will need to be cautious but unmistakably hawkish. This bodes ill for risk appetite as well as the Aussie’s yield advantage, threatening to deliver the currency a third consecutive weekly loss.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.