Australian Dollar US Dollar Exchange Rate Forecast: Could AUD/USD Surge if Fed Hikes Interest Rates?

AUD/USD Exchange Rate in Holding Pattern Ahead of Fed Rate Hike

The Australian Dollar to US Dollar (AUD/USD) exchange rate continues to trade in a narrow range this morning as markets await the Federal Reserve’s March rate decision later this week.

At the time of writing AUD/USD is largely unmoved from this morning’s opening levels of $0.770 and continues to hold close to a three-month low.

US Dollar (USD) Muted in Anticipation of Fed Rate Hike

The US Dollar is showing limited movement against the Australian Dollar this morning, having given up some of Monday’s gains overnight.

This comes as investors seek to hold their positions in USD in the run up to Wednesday’s rate decision by the Federal Reserve.

Economists overwhelming forecast that tomorrow’s decision meeting will see the Federal Open Market Committee (FOMC) vote to hike rates, with CME’s FedWatch Tool placing the odds of a hike at around 93%.

However with the near-certainty of the hike meaning that it has already been priced in by the majority of investors, it will be the bank’s outlook that markets are more likely to be focused on.

This could see the US Dollar experience some sharp losses if policymakers suggest that subdued inflation may prompt a more cautious approach from the bank in tightening monetary policy.

Australian Dollar (AUD) Steady Following Release of RBA Minutes

Meanwhile the Reserve Bank of Australia’s (RBA) published the minutes from its latest policy meeting earlier this morning, reinforcing the notion that the next hike is still some way off.

This left the Australian Dollar largely at a standstill during the Asian session last night.

The minutes confirmed that the most pressing concern for the RBA is lacklustre wage growth, which remains below expectations despite favourable economic conditions.

The RBA’s minutes read:

‘The improvement in overall conditions had not yet translated into a definitive pick-up in wages growth, which remained low.’

Forward-looking indicators suggested that spare capacity in the labour market would continue to decline gradually over 2018 and, as a consequence, wages growth was expected to rise gradually.’

AUD/USD Exchange Rate Forecast: Will US Dollar Tumble Despite Rate Hike?

Looking ahead the AUD/USD exchange rate will undoubtedly be dominated by the Fed’s rate decision on Wednesday.

Current forecasts see the US Dollar falling in the wake of the meeting, with the Fed unlikely to push for up to four hikes this year as initially suggested.

Meanwhile the focus for AUD investors this week will be on Australia’s latest labour report, due out on Thursday.

Economists predict the figures will show that Australia’s workforce continued to expand at a robust pace in February, possibly lifting the Australian Dollar.

However given the RBA’s recent focus on wages, the accompanying earnings figures may prove to have the greater impact on the ‘Aussie’, with a subdued reading likely to weigh heavily on AUD.

Luke Trevail

Luke studied Journalism at university but quickly moved into the financial sector, initially working in retail banking before joining TorFX in 2007. As a Senior Account Manager Luke assists in overseeing the management of the company’s exposure to currency volatility. He uses his years of foreign exchange experience to produce regular news updates exploring the latest currency movements.

Contact Luke Trevail