AUD powers back through US$0.66 after dovish Fed policy update

Daily Currency Update

The Australian dollar opened higher this morning, having lurched back above US$0.66 following the Federal Reserve’s (Fed) latest policy update. The AUD maintained a narrow range through the local session and led into the Fed’s December Federal Open Market Committee policy meeting as investors sidelined major bets. As expected, the Fed left rates on hold and many anticipated the Fed would continue to proffer a united message, reiterating that it's simply too soon to talk about easing financial conditions and that one more rate hike may still be required. Instead, Federal Reserve Chair, Powell offered a dovish assessment of future rate conditions, noting it is important that the Fed “not make that mistake” of holding higher rates for too long, admitting the Fed discussed the path to rate cuts in today’s policy agenda. These comments sent yields tumbling with 2-year rates hitting their lowest level in 5 months as markets price out 144 basis points of cuts through 2024. The AUD surged off US$0.6570, powering through US$0.66 and US$0.6650 marking intraday highs at US$0.6670 at time of writing.

With a key risk event behind us now, our attention turns to the domestic labour market and unemployment data. A robust read affords the RBA impetus to maintain a tightening bias, and after today’s Fed policy update, the prospect of one more domestic rate hike could help underpin AUD gains and create a yield advantage for the AUD through 2024.