The Australian dollar lifts as the Fed turns dovish

Jeff J Mitchell/Getty Images
  • The Australian dollar bounced on Wednesday as the US Federal Reserve indicated that rate hikes this year are unlikely.
  • The British pound tumbled on disappointment that any delay to Brexit is unlikely to be a long one.
  • Australia’s February jobs report will be released today. It will likely generate volatility in the Aussie dollar.

The Australian received a boost on Wednesday as the US Federal Reserve indicated that it’s unlikely to lift interest rates this year.

Here’s the scoreboard at 8am in Sydney on Thursday.

AUD/USD 0.7117 , 0.003 , 0.42%
AUD/JPY 78.81 , -0.12 , -0.15%
AUD/CNH 4.7601 , 0.0004 , 0.01%
AUD/EUR 0.6237 , -0.0005 , -0.08%
AUD/GBP 0.5395 , 0.0055 , 1.03%
AUD/NZD 1.0338 , 0.0003 , 0.03%
AUD/CAD 0.9463 , 0.002 , 0.21%

The main theme of the session was broad-based US dollar weakness following the release of Fed’s March monetary policy decision.

While the Fed kept its funds rate unchanged as expected, FOMC members took at axe to their forecast track for interest rates in the coming years with the median estimate now seeing no rate rise in 2019 and only one 25 basis point increase in 2020.

In December, the median member forecast saw two 25 basis point rate increases this year and a further hike in 2020.

The Fed also downgraded its forecasts for GDP growth, inflation and unemployment over the next few years, along with acknowledging that it will stop reducing the size of its balance sheet by September as long as economic and financial conditions evolve as it currently expects.

The dovish forecasts saw the US dollar slide, helping to lift the AUD/USD as high as .7149 at one point during the session.

News that the US is unlikely to roll back existing tariffs on Chinese goods entering the country — even if a trade deal is stuck in the coming months — was largely overlooked by traders on this occasion.

Investing.comAUD/USD Hourly Chart

Aside from the US dollar, the other big mover during the session was the British pound which fell heavily on disappointment that a long-term extension to Brexit is unlikely to be an extended one.

“GBP came under fresh pressure on news that UK PM Theresa May was requesting only a short Article 50 extension, to June 30th, from the EU,” said Ray Attrill, Head of FX Strategy at the National Australia Bank.

“In response, European Commission President Donald Tusk said that a short delay was possible, but contingent on the UK parliament passing Theresa May’s Brexit bill in parliament, where a third meaningful vote will more likely than not take place next week.”

Turning to the day ahead, it will be a busy one with a number of major releases scheduled during the Asian session.

First up, New Zealand Q4 GDP will be released at 8.45am AEDT.

That will be followed at 11.30am AEDT by Australia’s February jobs report, a release that will likely generate significant volatility in the Aussie dollar given speculation over the potential for rate cuts from the RBA in the coming months.

“If unemployment prints at 5.0% or lower this would mean no ‘smoking gun’ as yet for the RBA to shift its current thinking, which is that the justification for rate cuts is rising unemployment,” Attrill said.

This 10-second guide has more on what to look out for in the jobs report.

Later in the session, the main data highlights will be UK retail sales along with jobless claims and the Philly Fed manufacturing index from the United States.

The Bank of England will also announce its March monetary policy decision — it will likely come and go to little fanfare as no change is expected.

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