- The Australian dollar fell sharply on Wednesday as the US Federal Reserve provided no indication that it’s considering cutting official rates.
- On the outlook for interest rates, Fed Chair Jerome Powell said: “We do think our policy stance is appropriate right now. We don’t see a strong case for moving in either direction.”
- Chinese and Japanese markets remain closed, pointing to the likelihood of a sleepy Asian session. The data calendar picks up later in the day, although most of the releases are second-tier in nature.
The Australian dollar fell sharply on Wednesday as the US Federal Reserve provided no indication that it’s considering cutting official rates.
Here’s the scoreboard at 7am in Sydney on Thursday.
AUD/USD 0.7015 , -0.0033 , -0.47%
AUD/JPY 78.14 , -0.40 , -0.51%
AUD/CNH 4.7223 , -0.0257 , -0.54%
AUD/EUR 0.6265 , -0.0019 , -0.30%
AUD/GBP 0.5375 , -0.0032 , -0.59%
AUD/NZD 1.0589 , 0.0032 , 0.30%
AUD/CAD 0.9424 , -0.0016 , -0.17%
Having done very little in Asian and European trade, largely reflecting the impact of Labour Day holidays across both regions, the Aussie tumbled late in the session, undermined by neutral, rather than dovish, commentary from US Federal Reserve.
“Markets did not get hints of possible rate cuts from the Fed, causing US bond yields and the US dollar to rise in response,” said Westpac Bank’s FX strategy team.
“While the Fed reiterated their non-committal pledge to remain ‘patient’, the broader narrative is more optimistic and not consistent with market pricing for two Fed cuts by the end of 2020.”
As expected, the Fed left its key funds rate unchanged at 2.25-2.5%. It also cut the interest rate it pays excess reserves by 5 basis points to 2.35%, a technical adjustment intended to keep the effective Fed Funds rate more comfortably inside their target range, according to Westpac.
In the FOMC’s policy statement, the Fed upgraded its assessment on economic activity to “solid” from “slowed” in March, helping to offset a downgrade on inflation that has “declined” and “running below 2%.”
In his post-meeting press conference, Fed Chair Jerome Powell provided no indication the FOMC is considering cutting interest rates.
“We do think our policy stance is appropriate right now. We don’t see a strong case for moving in either direction,” Powell said.
On inflation, Powell remarked the recent deceleration was likely transitory in nature.
“[We] suspect that some transitory factors may be at work,” he said.
“Thus, our baseline view remains that with a strong job market and continued growth, inflation will return to 2% over time.”
The push-back against growing expectations for rate cuts — whether planned or not — weighed upon the AUD/USD, seeing it slip around 40 pips in the immediate aftermath of Powell’s remarks.
The Aussie’s decline against the greenback came despite largely soft US economic data released during the session.
The ISM’s manufacturing PMI for April tumbled to 52.8, the lowest level since October 2016. Construction spending also tanked in March, falling 0.9%, almost completely reversing the 1% gain recorded in February.
The only data beat came from the ADP National Employment Report with private-sector hiring lifting by 275,000 in April, above the 180,000 increase expected and the largest gain in nine months.
Turning to the session ahead, it promises to be another quiet Asian session on Monday with Japanese and Chinese markets remaining closed for public holidays.
There’s also nothing major on the data calendar across the region, pointing to the likelihood of a sleepy first half of the session in the absence of any unexpected headlines or any abrupt market moves.
As many European markets return from holidays, the calendar will heat up in the latter parts of the day with manufacturing PMIs and the Bank of England monetary policy decision the headline acts.
On the latter, no change is expected nor likely.
In the US, factory orders, jobless claims, labour costs and the Empire State manufacturing index will also be released.
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