Home Daily Commentaries AUD collapses as Fed hints at higher rates through 2025

AUD collapses as Fed hints at higher rates through 2025

Matt Richardson
Written by
Matt Richardson

Matt Richardson

OFXpert

Matt provides expertise in currency risk management to his clients, drawing from his 14 years of experience in foreign exchange.

| Thursday 19 December, 2024

Daily Currency Update

The Australian dollar dropped through trade on Wednesday, falling through US$0.63 following the Federal Reserve's (Fed) December policy meeting. The AUD tracked sideways through the domestic session and bounced between US$0.6305 and US$0.6340, leading into the Federal Open Market Committee’s (FOMC) final policy update for 2024. As expected, the Fed cut rates by 25 basis points but shifted its guidance for rate cuts through the short end of the yield curve. The Fed’s dot plot showed policymakers anticipate only needing to lower rates twice next year while increasing the long run neutral rate through 2025, 2026 and 2027. Markets were forced to adjust positions, driving the AUD through US$0.63 and US$0.6250 to mark new lows below US$0.6240. The AUD now sits only marginally above its October 2022 low, and is now at its lowest point since the early days of the pandemic. With the US economy proving remarkably resilient and the outlook for global trade and tariffs casting a pessimistic pall across the Asia Pacific, the outlook for the AUD through the first half of 2025 is incredibly bearish.

Our attention now turns to the Bank of England, Bank of Japan, Norwegian Norges Bank and the Swedish Riksbank, as they all proffer their final monetary policy announcements for 2024.

Key Movers

The US dollar rose sharply on Wednesday following the Federal Reserve's final policy meeting for 2024. Policymakers lowered rates by 25 basis points as anticipated but adopted a hawkish tone when assessing the outlook for future cuts. Officials halved the number of anticipated cuts for 2025 and increased longer run neutral rate expectations through the next 3 years. With the US economy proving remarkably resilient and inflation tracking with target, US yields rose sharply driving the USD DXY index 1% higher as major pairs collapsed. The AUD and NZD led the decline, with the EUR, GBP and yen not far behind. The euro gave up 1.3% plunging through 1.04 to mark new lows just above 1.0360 while the GBP dropped 1.15 sliding off 1.27 and 1.26 to hit session lows marginally above 1.2580.

Our attentions turn now to the Bank of England and Bank of Japan policy meetings. We expect the Bank of Japan (BoJ) will leave rates on hold, despite data making a case for a hike. Recent commentary from BoJ officials suggest the bank has a preference to holding back rate hikes into 2025. We expect the BoJ will signal a hike in January, with rates climbing to 0.75% by the end of next year. The Bank of England (BoE) is expected to leave rates on hold at 4.75%, stronger wages and inflation data have forced a correction in rate cut expectations for 2025. We are keenly attuned to commentary and guidance from BoE officials.

Expected Ranges

  • AUD/USD: 0.6200 - 0.6400 ▼
  • AUD/EUR: 0.5980 - 0.6080 ▼
  • GBP/AUD: 1.9900 - 2.0500 ▲
  • AUD/NZD: 1.0980 - 1.1080 ▼
  • AUD/CAD: 0.8920 - 0.9070 ▼

Written by

Matt Richardson

OFXpert

As a Senior Corporate Client Manager, Matt provides expertise in currency risk management to his clients, drawing from his 14 years of experience in foreign exchange. Matt has clients who he has been working with for over a decade, a testament to his knowledge and dedication in the field. Matt is also a regular contributor on Ausbiz, offering clear and precise updates on currency market trends, showcasing his ability to interpret complex financial data into actionable insights.