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AUD tumbles as rate Fed signals aggressive stance

Thursday 27 January, 2022

Daily Currency Update

The Australian dollar fell sharply through trade on Wednesday, again testing the lower bounds of recent ranges as the Fed signals an imminent rate adjustment and significant balance sheet reductions. Price action across major currency was muted in the lead up to the Fed policy decision, and the AUD tracked between 0.7160 and 0.7180 for much of the domestic session and the early part of overnight trade. In the absence of risk demand, the AUD tumbled off 0.7170 touching 0.71 as Fed Chair Jerome Powell played up the likelihood of an aggressive rate hike program, confirming a 50-basis point rate hike next month was not out of the question. There is a sense amongst policymakers that the labour market is strong enough to absorb a significant uptick in interest rates and with inflation risks continuing to rise there is little choice but to tighten financial conditions. Equities suffered while the USD surged higher. Having found support at 0.71 the AUD is holding marginally above the weekly low at 0.7090, yet pressures remain firmly to the downside, and we expect upside gains approaching 0.72/0.7250 will be hard won. Our attentions turn now to a host of US data sets ahead of next week’s RBA policy update.

Key Movers

The US dollar rallied sharply following the Fed’s policy update and press statement, as two key headlines drove equities and risk assets lower. Fed Chair Jerome Powell hasn’t ruled out hiking rates at all remaining FOMC policy meetings this year, as policymakers are now comfortable there is ample slack within the labour market to absorb a series of rate hikes without hurting future employment growth. Powell’s comments did little to ease the sell off across equities, in fact, his aggressive stance accelerated losses across major indices while driving most major currencies lower against the USD. The EUR has broken key technical support, slipping below 1.1270 and 1.1250 marking intraday lows at 1.1240 while the GBP tumbled below 1.35 to touch 1.3450. Momentum is again firmly behind the US dollar, with sellers in control and risk aversion increasing. We expect the US dollar will remain in vogue as we move toward the Fed’s next policy update on March 16th.

Expected Ranges

  • AUD/USD: 0.7070 - 0.7190 ▼
  • AUD/EUR: 0.6280 - 0.6370 ▼
  • GBP/AUD: 1.8820 - 1.9020 ▲
  • AUD/NZD: 1.0650 - 1.0730 ▼
  • AUD/CAD: 0.8980 - 0.9050 ▼