Australian Dollar Outlook: RBA and Fed Hike but Sentiment Sways

Australian Dollar Forecast: Bullish

• The Australian Dollar remains in the range as external factors dominate
• The US Dollar continues to be the driver of most markets after the Fed hike
• With the RBA and Fed decisions out of the way, will sentiment move AUD/USD?

The Australian Dollar went on the rampage to end last week as the US Dollar slid lower despite Treasury yields ticking higher after solid economic data capped off an event filled few days.

The RBA raised its cash rate by 25 basis points (bp) last Tuesday to 3.85% after first-quarter CPI came in at 7% year-on-year to the end of March, well above the 2-3% mandated target band.

Not to be outdone, the Federal Reserve and the European Central Bank (ECB) also raised their cash rates by 25 bp in the ensuing days.

The language from Fed Chair Jerome Powell was unequivocal with the message being that future decisions will be data-dependent on a meeting-by-meeting basis and will require ongoing assessment.

Interest rate futures and swaps markets took on a somewhat struthious interpretation and are now pricing in a cut by the Fed in the third quarter.

It’s possible that they have been emboldened by accurately prophesising the hiking cycle when the Fed fell behind the curve coming out of the pandemic. This is the price of reputational damage.

After the RBA’s decision, the Aussie Dollar has been caught up in the macroeconomic vortex that has been engulfed by concerning messages. Essentially, China is yet to reawaken economically, and the US is staring down the prospect of an impending recession.

Australia’s trade surplus clocked in at an astonishing AUD 15.27 billion for the month of March, the second-largest boost on record. Iron traded on both the Singapore and Dalian exchanges have been moving lower but this doesn’t impact Australia’s top export too much as the large miners are mostly locked into long-term contracts.

Despite the rambunctious rally going into the weekend, the Aussie appears to be ensconced in the 0.6565 – 0.6806 range of the last 2-months.

The path ahead has few anchor points in terms of data but sentiment toward risk or otherwise might be the driving factor. This may see bond yields respond in kind and the 2-year part of the curve might provide clues for AUD/USD direction.

AUD/USD AGAINST AU – US 3 -YEAR GOVERNMENT BOND SPREADS

--- Written by Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel via @DanMcCarthyFX on Twitter