Australian Dollar to US Dollar Exchange Rate (AUD/USD) Holds Gains as Federal Reserve Shows Caution
Since investors took a pause from the US Dollar’s (USD) recent rally at the beginning of the week, the Australian Dollar to US Dollar (AUD/USD) exchange rate has been climbing. Will the USD rally resume, or has Federal Reserve caution dampened demand for the US currency?
After trending close to the interbank level of $0.75 for most of last week, since Monday AUD/USD has been moving higher. The pair briefly touched on a high of 0.76 but has generally continued to trend in the region of $0.75.
The Australian Dollar (AUD) has benefitted largely from US Dollar (USD) weakness, but amid a lack of strong supportive domestic or commodity stats ‘Aussie’ gains have been limited.
Still, AUD was able to more easily hold its ground against USD on Thursday as investors digested the latest Federal Reserve meeting minutes. The May report revealed the bank was more cautious than expected regarding monetary policy.
US Dollar (USD) Exchange Rate Selloff Continues as Federal Reserve Shows Caution
While May’s Federal Reserve policy decision was perceived as generally optimistic, the meeting minutes published on Wednesday were more cautious than markets had expected.
Weighing slightly on market hopes for four 2018 interest rate hikes from the bank, the Federal Reserve expressed concern about trade jitters and noted that officials were willing to let inflation run above-target temporarily.
Discussing how US trade uncertainties could impact US businesses, the Fed’s meeting minutes revealed that:
‘A number of participants viewed the range of possible outcomes for economic activity and inflation to be particularly wide, depending on what actions were taken by the United States and how US trading partners responded, and some participants observed that while these policies were being debated and negotiations continued, the uncertainty surrounding trade issues could damp business sentiment and spending.’
Speaking about inflation, the Fed indicated it would allow inflation to rise above its 2% targets for a ‘temporary period’.
This indicated to investors that the Fed was in no hurry to tighten its 2018 monetary policy, though the bank did hint that a June interest rate hike is still likely.
The bank’s tone caused Treasury bond yields to fall and has been the primary cause of US Dollar (USD) weakness on Thursday.
Australian Dollar (AUD) Exchange Rates Holds Firm despite Lack of Support
Investors have had little reason to keep buying the Australian Dollar (AUD) this week, besides weakness in its rivals, as commodity news has been mixed and there has been no solid domestic support for the currency.
Australia’s Q1 construction work report disappointed on Wednesday, only improving from -18.3% to 0.2% rather than the expected 1.1%.
Westpac’s leading index saw a modest improvement in April, climbing slightly from -0.2% to 0.2%.
Overall though, this data did little to actually improve the Australian Dollar outlook. Instead, the primary reason for AUD/USD gains this week has been the US Dollar’s (USD) fall.
Australian Dollar to US Dollar (AUD/USD) Forecast: Will US Dollar Rally Continue?
While the Federal Reserve took a more cautious stance at its latest meeting, the US economic outlook is still strong and investors are still generally optimistic that a deal can be reached on trade between the US and China.
Investors also still widely expect the Fed is moving towards hiking US interest rates in June.
As a result, upcoming US data could influence whether or not the US Dollar (USD) rally continues, or if it is over for now.
Durable goods orders data will be published before the week is out, but next week will see the publication of more major US stats. including Q1 Gross Domestic Product (GDP) projections and May Non-Farm Payroll results.
Some influential Australian ecostats will be published too, which could give the Australian Dollar (AUD) stronger support if they impress. At the end of next week, AiG’s manufacturing results for May and April retail sales results will be published.
Of course, any major developments regarding global trade could also influence the trade-correlated Australian Dollar to US Dollar (AUD/USD) exchange rate over the next week.