Australian Dollar US Dollar (AUD/USD) Exchange Rate Sinks as Fed Head Powell Gives Upbeat Testimony

Fed Chairman Powell Sees Gradual Rate Hikes – Australian Dollar US Dollar (AUD/USD) Exchange Rate Slips

The Australian Dollar US Dollar (AUD/USD) exchange rate pulled back in the early hours of Tuesday, retreating as markets reacted to the release of US Fed Chairman Jerome Powell’s Congressional testimony.

Mr Powell announced that the central bank can continue to gradually raise interest rates, asserting that the US growth outlook remains strong, and that the recent run of financial volatility should not weigh on US economic growth.

Powell stated:

‘Some of the headwinds the US economy faced in previous years have turned into tailwinds. Fiscal policy has become more stimulative and foreign demand for US exports is on a firmer trajectory.’

His direct comments on monetary policy, however, were slightly more cryptic, as he avoided clear guidance on the possibility of a rate hike in March:

‘In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2% on a sustained basis.’

Nonetheless, optimism remains on the back of current higher-than-expected US inflation readings, the record low unemployment rate and accelerated wage growth readings.

There are, however, some who claim that four rate hikes this year, rather than three, could be too much at once for the US economy, with St Louis Fed President James Bullard sharing his concern:

‘I have been a little bit concerned that the committee goes too far too fast. If we are going to do a lot of rate hikes we have to have data that supports that.’

In this respect even ‘Greenback’ bulls are slightly apprehensive about the prospect of a rate hike in March, with more rate hikes than expected this year just as likely to cause controversy as it would cause increased demand for the US Dollar.

In other news, today’s run of US data prints proved soft, with the advanced goods trade balance reading for January and the durable goods orders figure both contracting in January.

Credit Suisse Warning Limits Australian Dollar (AUD) Exchange Rates

Australian Dollar (AUD) exchange rates were also limited on Tuesday by a gloomy report from the financial services company Credit Suisse, with the group warning that the Reserve Bank of Australia (RBA) might have been overly optimistic in their economic outlook.

The RBA had previously been optimistic about the progress of inflation and the general state of the Australian economy moving forward, but Credit Suisse analysts believe that this could be a premature outlook.

The company stated:

‘The RBA has become renowned over the years for delivering hawkish and arguably credible narratives, supported by consistent upward inflection points in its growth and inflation forecasts, virtually dismissing near-term undershoots, resulting in consistent over-prediction of real GDP growth and core CPI inflation. (However), we think that there is evidence of erosion in the RBA’s inflation targeting credibility.’

This outlook is supported by the disappointing rise in Australian private sector wages, with last week’s readings (that struggled to keep up with inflation) seeming to be the nail-in-the-coffin, as it were, for a near-term rate hike from the central bank.

Australian Dollar US Dollar (AUD/USD) Exchange Rate Forecast: US GDP in the Spotlight

The Australian Dollar US Dollar (AUD/USD) exchange rate could find room to claw back some losses this week depending on the performance of Wednesday’s US growth estimates.

Markets currently expect the second Q4 estimate for 2017 to print at 2.5%, down from the previous reading of 3.2%.

If this occurs then the US Fed could be prompted to lower their growth expectations for the year ahead – an event that could strip demand away from the ‘Greenback’ as rate hike prospects in March diminish.

John Cameron

John studied economics at Cambridge University and later became an MSTA qualified Technical Analyst. He began working for TorFX almost a decade ago and now holds a Senior Account Manager position. As well as lending his clients support and guidance, John has produced market commentary and detailed exchange rate analysis for a number of online publications.

Contact John Cameron