Fundamental Australian Dollar Forecast: Bearish

  • The Australian Dollar got a modest lift last week against its broadly weaker US cousin
  • The US central bank sounded rather unsure about inflation’s strength
  • This week offers plenty more US economic clues

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Australian Dollar bulls were modest beneficiaries of a little US Dollar weakness last week.

Commentary from the US Federal Reserve evinced a central bank still very unsure that inflation is going to rise strongly enough to warrant a series of interest-rate hikes beyond the one still probably coming in December. Guessing how many more might be headed our way is arguably the biggest game in town for global financial markets. So, any thought that the Fed might be wavering is usually enough to give the US Dollar a general knock. It duly got one.

However, in one sense it hardly seems justified that the Australian Dollar should rise too far on this sort of speculation. After all the Reserve Bank of Australia hardly seems to be in any hurry to raise its own, record low Official Cash Rate. Moreover, following a review of the country last week, the International Monetary Fund suggested that the OCR could stay put for another year with only gradual rises likely beyond that.

Still, as just one more US move would finally erode the Aussie’s long-held yield advantage over the greenback, there is clear investor interest at stake here.

The coming week offers plentiful economic data snapshots from both the US and Australia. We’ll also get some numbers out of China, including the manufacturing Purchasing Managers Index which can often move AUD/USD. However, in the end it’s the US numbers and their effects on the monetary prognosis which are likely to matter most for Aussie.

Wednesday will bring a second look at the US’ third-quarter Gross Domestic Product figures. An upward revision is expected from the 3% annualised preliminary growth rate, with the markets now looking for a 3.4% gain.

Much may depend on whether they get it but, assuming the forecasts for next week’s US numbers are broadly on the money, then the US Dollar could be back on form and AUD/USD’s downtrend should restart.

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter:@DavidCottleFX