The Australian dollar receives a boost as traders price in more aggressive Fed rate cuts

Hannah Peters/Getty Images
  • The Australian dollar rebounded on Friday after falling to fresh multi-month lows against the greenback a session earlier.
  • US economic growth surged in the March quarter. However, the details were not all that impressive, including a steep deceleration in US inflationary pressures to start the year.
  • Markets now expect the US Fed will cut official interest rates by the end of this year, weighing on the US dollar during the session.
  • The economic data calendar is quiet to start the week. Japanese markets will remain closed until early next week for holidays.

The Australian dollar rebounded modestly on Friday, recovering having fallen to fresh multi-month lows against the greenback a session earlier.

Here’s the scoreboard at 7.50am in Sydney on Monday.

AUD/USD 0.7041 , 0.0002 , 0.03%
AUD/JPY 78.56 , 0.07 , 0.09%
AUD/CNH 4.7454 , 0.0033 , 0.07%
AUD/EUR 0.6315 , 0.0006 , 0.10%
AUD/GBP 0.5448 , 0.0005 , 0.09%
AUD/NZD 1.0566 , 0.0003 , 0.03%
AUD/CAD 0.9475 , 0.0007 , 0.07%

Having fallen below .7000 for the first time since January 3 on Thursday, the AUD/USD slowly ground higher throughout Asian, European and early North American trade, eventually hitting a session high above .7060 following the release of preliminary US Q1 GDP data.

While the headline rate, at 3.2% annualised, came in well above the median economist forecast for a smaller increase of 2.3%, the details of report were mixed as strong increases in inventories, net exports and government expenditure masked a steep slowdown in household consumption during the quarter.

“All three of these positive surprises should reverse, at least in part, in Q2,” said Joseph Capurso, Senior Currency Strategist at the Commonwealth Bank.

Excluding the impact of inventories, trade and government spending, final sales to private domestic purchasers grew by just 1.3% annualised, the weakest increase in three years, according to analysis from Westpac Bank.

The slowdown was largely due to a sharp moderation in household consumption, the largest part of the US economy.

Along with the soft internal details of the US GDP report, underlying measures on inflation also softened, resulting in a steep drop in US government bond yields during the session.

“The Fed’s preferred core PCE deflator fell to 1.3%, down sharply from 1.8% in Q4 and below the 1.4% consensus estimate,” said Ray Attrill, Head of FX Strategy at the National Australia Bank.

“Interest rate markets moved the implied probability of a 2019 easing out to 106% from 90% prior to the GDP release.”

The drop in US bond yields, reflecting a growing belief that the Fed will cut its funds rate by at least 25 basis points before the end of the year, weighed on the US dollar, helping the AUD/USD hold on to most of its earlier gains despite the big beat in headline GDP growth.

After rising to as high as .7061, the AUD/USD eventually eased to close the week at .7039, a level it continues to trade at in early Asian trade on Monday.

Investing.comAUD/USD Hourly Chart

Looking ahead, there’s very little on the economic calendar to start the week, partially reflecting that Japanese markets will be closed until early next week for an extended Golden week holiday.

The main highlights all arrive in the second half of the session with monetary growth and consumer confidence from the eurozone, along with personal consumption and spending data from the US, including the monthly reading of core PCE inflation, the headline acts.

Bank of England governor Mark Carney is the only notable central bank speaker scheduled to talk during the session.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.