Australian Dollar to US Dollar (AUD/USD) Exchange Rate Rises as Fed’s Dovish Signals Continue

Australian Dollar US Dollar (AUD/USD) Exchange Rate Shakes off Investment Lending Decline

Another month of sharp decline in Australian investment lending was not enough to prevent the Australian Dollar to US Dollar (AUD/USD) exchange rate recovering ground this morning.

Even though lending saw a -1.7% contraction in May, defying forecasts of modest 0.5% growth, the Australian Dollar (AUD) remained on a positive footing against its rivals.

As the accompanying home loans figure bettered expectations, showing only a slim -0.1% contraction on the month, this gave investors some cause for confidence.

With market risk appetite generally elevated in the wake of the latest set of Federal Open Market Committee (FOMC) meeting minutes, given the increasingly dovish tone of policymakers, the mood of AUD exchange rates improved.

Fresh Signs of Fed Dovishness Weigh Heavily on US Dollar (USD) Exchange Rates

The US Dollar (USD) fell further out of favour with investors as a result of the dovish meeting minutes, with a July interest rate appearing an increasingly certain prospect.

Commentary from Fed Chair Jerome Powell also weighed heavily on USD exchange rates, as Aila Mihr, senior analyst at Danske Bank, noted:

‘The testimony from Fed Chairman Powell all but confirmed that the next move from the Fed is an easing of monetary policy. During his hearing, Powell stressed that uncertainty since the June meeting continued to dim the outlook for the US economy and that trade war risks overshadow the healthy labour market.

‘On the back of the dovish language, markets started to reprice the probability of a 50bp cut at the end of the month (now back up at 25%).’

With markets pricing in the prospect of an imminent rate cut the US Dollar was left to trend lower across the board today.

Signs of Weakening US Inflation to Dent US Dollar (USD) Appeal Further

The AUD/USD exchange rate could gain further ground this afternoon if June’s US consumer price index data disappoints.

Forecasts point towards the headline inflation rate easing from 1.8% to 1.6% on the year, with price pressures also expected to stagnate on the month.

While the consumer price index is not the Fed’s preferred measure of inflation any weakness here would still add to the case for policymakers to cut interest rates sooner and more sharply.

On the other hand, signs of resilience within the inflation data could offer the US Dollar a rallying point, even as worries over the wider economic outlook remain.

Australian Dollar (AUD) on Vulnerable Footing Ahead of RBA Minutes

Ahead of the release of the Reserve Bank of Australia’s (RBA) latest set of meeting minutes next week the Australian Dollar could come under renewed pressure.

Markets remain wary of the prospect of the RBA cutting interest rates again before the end of the year, on the lookout for any increased signs of dovishness within the minutes.

Signs that the RBA is likely to cut interest rates to a fresh record low in the coming months would leave AUD exchange rates vulnerable to selling pressure.

However, if policymakers show signs of increased confidence in the economic outlook this could offer the Australian Dollar a fresh boost against its rivals.

Louisa Heath

Contact Louisa Heath