The Australian Dollar to US Dollar exchange rate recovered from 0.7440, its lowest level since the first week of July, following the Federal Reserve’s July policy decision. Despite increased RBA rate cut bets after Wednesday’s Australian CPI report, the ‘Aussie’ remains overvalued and AUD/USD trends high around 0.7535.
Australian Dollar (AUD) Boosted by Weak US Dollar
The Australian Dollar was undermined throughout Wednesday trade as mixed Australian inflation results led to increased bets that the Reserve Bank of Australia (RBA) would cut the Australian interest rate in next week’s policy decision.
While quarterly inflation improved from -0.2% to 0.4% from the first quarter to the second quarter as forecasts predicted, the yearly Consumer Price Index (CPI) slumped past 1.1% from 1.3% to 1.0%.
This shocking 17-year-low was not enough to send the ‘Aussie’ plummeting for long however,with higher risk currencies in heightened demand ahead of the Federal Reserve’s interest rate decision.
As a result, ‘Aussie’ market movement has been muted, with RBA rate cut bets mixed despite the ‘Aussie’ remaining overvalued – a factor that has concerned RBA officials.
The Australian Dollar was able to easily capitalise during Wednesday’s American session and into Thursday as a US Dollar selloff led to a brief increase in sentiment for risk-correlated currencies like the ‘Aussie’.
US Dollar (USD) Slumps Despite Hawkish Fed
Recent US ecostats have indicated that the nation’s economy was in good health in July, despite concerns that Britain’s vote to leave the European Union would be destabilising to global markets.
This was a sentiment that Federal Reserve officials echoed during Wednesday’s Federal Open Market Committee (FOMC) meeting.
While the Fed decided to leave the key US interest rate on hold at 0.50%, the Fed was optimistic about the US economy, stating that many of the risks to the near-term economic outlook had faded.
US Rate Hike Bets Up for 2016
Bets of a July rate hike were below 3%, but the US Dollar experienced a selloff regardless as market focus shifted towards the Bank of Japan (BoJ) ahead of Friday’s session.
On the other hand, the optimism of Fed policymakers has led to an increase in bets that the Fed would still hike interest rates at least once in 2016, with some analysts even calling for a rate hike in September.
With the Fed downplaying the effects of global headwinds like the Brexit in its July meeting, markets are now focused on the US economy itself.
AUD/USD Forecast: US Data, RBA Meeting in Week Ahead
The US Dollar is unlikely to remain low for long, as the Federal Reserve’s hawkishness has indicated that the US economy is in a good place – which will lead to a sturdy US Dollar.
Its recovery could be boosted on Friday by key data, such as Q2 Gross Domestic Product (GDP) and Q2 personal consumption. If these score above expectations, US economic sentiment will continue to rise and allow the US Dollar to push the ‘Aussie’ back down.
Next week will be a big one for Australian Dollar traders, with the Reserve Bank of Australia (RBA) policy decision being held during Tuesday’s Asian session.
Rate cut bets are still mixed after this week, but a rate cut is entirely possible following previous RBA hints and in light of an overvalued Australian Dollar and underwhelming inflation figures.
With ‘Aussie’ movement on Q2 inflation having been muted this week, market reaction to the RBA’s decision may prove more dramatic.