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AUD driven higher despite a hawkish Federal Reserve

Thursday 16 December, 2021

Daily Currency Update

The Australian dollar advanced through trade on Wednesday, climbing back toward 0.7170 following the FOMC and Fed policy update. Having maintained a narrow handle through the lead into the days main risk event the AUD jumped sharply, bouncing off weekly lows and through technical resistance handles. As expected, the Fed announced an acceleration in the pace of QE tapering, while the majority of policy makers expected to raise interest rates at least 3 times throughout 2022. There were few surprises from the Fed with the market already pricing in three rate hikes, the unknown becomes the known and investors seem comfortable in absorbing a monetary policy tightening. Risk assets gathered momentum in the wake of the policy update and testimony from Fed President Jerome Powell. Equities surged higher dragging the AUD upward, with momentum carrying the currency back toward the upper end of recent extensions through 0.7185, which could see the bias tip toward bulls and push the AUD back through 0.72 US cents. Our attentions turn now to domestic labour market data and unemployment numbers. The first print since restrictions began to ease, we expect a significant improvement in employment growth and an increase in the participation rate. With some analysts pricing in a 300K jump in jobs created, a print above 200 could help the AUD build on the days early momentum.

Key Movers

Price action across major currencies was muted in the lead up to the Fed policy update with investors content to sideline major bets. As expected, the Fed offered few surprises and while adopting a hawkish tone an undercurrent of uncertainty and caution allowed investors to squeeze positions and chase risk assets higher, winding back the weeks earlier losses. Having touched lows at 1.1230, the euro climbed back to 1.13, while the GBP bounced back through 1.32 to touch intraday highs at 1.3280. The Japanese yen was the days big loser, meeting sustained selling pressure following the resurgence in risk demand, while giving up recent gains against the USD amid a widening gap in monetary policy and yield expectations. With the Bank of Japan expected to maintain an uber accommodative policy framework, the Fed’s clear path to normalisation opens the door for another break through 115. The yen’s saving grace remains fluctuations in the risk narrative and with omicron rapidly spreading across the globe, there is scope further lockdowns and public health restrictions could dampen optimism for a 2022 global economic recovery. Our attentions turn now to the ECB and Bank of England. We expect the ECB will announce a plan to reduce the Pandemic Emergency Bond Purchasing Programme but at the same time announce an increase in its traditional Asset Purchase Programme, maintaining a high degree of stimulus and support. We expect few surprises from the Bank of England with any tightening in monetary policy likely deferred into February 2022.

Expected Ranges

  • AUD/USD: 0.7070 - 0.7220 ▲
  • AUD/EUR: 0.6250 - 0.6420 ▲
  • GBP/AUD: 1.8380 - 1.8630 ▼
  • AUD/NZD: 1.0530 - 1.0620 ▲
  • AUD/CAD: 0.9090 - 0.9230 ▲