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Aussie range bound ahead of next weeks Fed policy meeting

AUD - Australian Dollar

The Australian dollar lurched upward in early trade on Friday as market bets the Federal Reserve will cut rates by 50 basis points when it meets next week gathered momentum. Comments from New York Fed President John Williams spooked investors forcing a sharp re-positioning of interest rate expectations prompting the AUD to bounce through resistance at 0.7030/40 to touch three-month highs at 0.7076. The Aussie however, couldn’t hold onto the upturn, correcting back toward 0.7040 as Fed officials sought to add some scope to Williams comments, confirming a proactive approach to combat stagnant inflation did not translate to an immediate and aggressive interest rate correction.

The AUD remains largely beholden to Fed policy when assessing direction. The Aussie dollar offered little in the way of a response to the Reserve Banks minutes mid-week and has largely failed to issue any real material change in value despite the recent easing bias. As such short-term direction will be heavily influenced by next weeks FOMC and Fed rate announcement. With little of note on the calendar this week, broader sentiment flows will guide markets while we expect ranges to remain relatively narrow as investors sideline themselves ahead of the Fed decision.

Key Movers

The US dollar recovered early session losses on Friday as Fed spokespersons sought to clarify comments issued from New York Fed President John Williams. Williams had argued for a pre-emptive strike on interest rates in a bid to deal with stagnant inflation forcing markets to rapidly correct interest rate expectations before Fed officials confirmed the comments were merely academic and not indicative of Fed thinking in the lead up to next weeks policy meeting. Markets are now pricing in a 25% chance the FOMC will cut rates by 50 basis points down from near 61% on Friday.

The Euro fell sharply against key counterparts, slipping against the rebounding dollar, while collapsing to touch 2-year lows against the safe haven Swiss Franc. Expectations the ECB will cut interest rates by 10 basis points on Thursday forced the 19-nation combined unit toward monthly lows and a break below 1.12. Markets are divided on whether the ECB will pull the trigger and extend its easing bias with a portion of analyst pushing back rate cuts until September with the introduction of QE at some point in early 2020. The divide leaves the door open for greater volatility this week as Policy makers could provide the catalyst that pushed the currency outside recent bounds.

Expected Ranges

AUD/USD: 0.6980 - 0.7080 ▼

AUD/EUR: 0.6230 -0.6330 ▲

GBP/AUD: 1.7580 - 1.7980 ▲

AUD/NZD: 1.0350 - 1.0550 ▼

AUD/CAD: 0.9110 -0.9280 ▲