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Cautious FOMC minutes force USD lower

By MATT RICHARDSON

The Australian dollar was marred yesterday by Moody’s downgrade in China’s credit rating. Initially starting the day at 0.7475 against the US dollar, markets saw a third of a cent shed on the Aussie after news came to light of the first downgrade by Moody’s in China since 1989 from Aa3 to A1. The Construction work print for the month also saw a contraction for the month as the afternoon saw an intraday low of 0.7445. The Fed Reserve minutes released overnight supported the view of a “probable” June rate hike with the Greenback reacting negatively to the news, hoping for a more hawkish tone. This caused the Aussie to rally back up and test the 0.75 handle on open this morning.

The Pound Sterling remained under the 1.30 handle during yesterday’s day of trade, having moved up towards 1.2994 late in the Asian session. Comments from Theresa May the UK Prime Minister pulled the GBP/USD lower to 1.2927, she said the terror threat level in the country been raised to “critical”, which suggest another attack could be “imminent”.  As the US session began, the release of the Federal Reserve minutes saw the US Dollar weaken across the board. They remain cautious in the outlook for inflation but continue to leave the door open for a near-term rate hike. Fundamentally it has been a quiet week in the UK, but that will change today with the release of Second Estimate GDP for the first quarter. This event, which should be treated as a market-mover, is expected to post a gain of 0.3%. 

The New Zealand dollar has maintained its impressive upward trajectory overnight, spending the majority of the past 24 hours above support at the 70 US Cents handle.  Rising from lows of 0.6838 which were only witnessed last week, investors have been left disappointed overnight following the release of minutes from the Federal Open Market Committees most recent meeting. Whilst expectations of a rate hike next month have firmed, a clearer picture with reference to future rate hikes was notably absent. Pushing to an eventual high of 0.7058 when valued against its US Counterpart, investors today will be watching the New Zealand governments budget with topside from existing elevated levels to be limited should a conservative fiscal stance be adopted in the context of an economy which is already showing signs of strength. Stronger this morning the Kiwi currently buys 70.42 US Cents. 

The U.S Dollar sell off resumed through trade on Wednesday as investors tracked the path of least resistance following the FOMC’s May meeting minutes. Analysts and market participants began revising expectations for forward monetary policy after the minutes offered a somewhat dovish undertone and highlighted a cautious approach to tighter interest rates. While investors are still pricing in a June rate amendment the likelihood of the Fed raising rates twice through the end of the year has slipped below 50 percent. While downside moves have been tempered the upside potential will now be closely linked to improving macroeconomic data sets. The Dollar pushed back toward six and a half month lows while the Euro moved back through 1.12 and the Yen forces the Dollar back toward 111.50. As attentions turn to Friday’s durable goods orders and Prelim GDP data for macroeconomic direction the pall of political uncertainties will likely weigh on the Greenback through the rest of the week.