AUD/USD holds above 0.6665 awaiting US Fed’s decision
- The Aussie Dollar ticks down from year-to-date highs at 0.6690 but remains steady above 0.6665.
- The US Dollar is trimming some losses as investors grow cautious ahead of the Fed's decision.
- In Australia, Thursday's employment figures might provide further clues about the RBA's rate path.
The Australian Dollar is trading lower from year-to-date highs at 0.6690 on Wednesday, yet with downside attempts limited above previous highs, at the 0.6665-0.6670 area, as investors await the outcome of the Fed’s meeting, due later today.
The US Dollar Index, which measures the value of the Dollar against a basket of currencies, is trimming losses after having depreciated nearly 2% from Friday’s lows. Investors are cutting US Dollar short holdings ahead of the Fed decision, which is pushing most USD peers lower from relevant highs.
Australian Dollar trims gains as risk appetite falters
The Aussie rallied about 2.7% over the last two weeks as weak US employment data prompted investors to ramp up their bets on Fed monetary easing for the following months. Future markets are fully pricing a quarter-point rate cut on Wednesday, and the chances of two more cuts in October and December have risen beyond 70% from about 35% one month ago.
US data released on Tuesday showed that retail consumption remains resilient. August’s Retail Sales increased 0.6%, beyond market expectations of a 0.2% growth, and July’s data was revised up to a 0.6% rise from the 0.5% previously estimated.
In Australia, the focus is on the August Employment release, due on Thursday, for further insight into the RBA’s next monetary policy decision. The Unemployment rate is expected to have remained steady at 4.2% but net employment growth is seen slowing down to 22K from 24.5K in July.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.