AUD/USD extends overnight rejection of key 200-day SMA.
Hawkish FOMC minutes weigh on investor sentiment and the risk-sensitive Aussie.
Bets that the Fed is done hiking are undermining the USD and should help limit losses.
The AUD/USD comes under some selling pressure heading into Wednesday’s European session, and continues to retreat from its highest level since August 10th, around the 0.6590 level touched the previous day. Investors turned cautious after the hawkish FOMC minutes, which reaffirmed the Federal Reserve’s (Fed) stance on keeping interest rates higher for longer.
Policymakers remain committed to tightening policy further if progress in controlling inflation falters, casting doubt on the notion that the Fed is done raising rates. This led to a modest recovery in the U.S. dollar (USD) and U.S. Treasury yields overnight, which in turn is seen as weighing on risk-sensitive assets, including the Australian dollar (AUD).
Meanwhile, FOMC members agreed that they can proceed cautiously and make policy decisions based on the totality of incoming data and its implications for the economic outlook as well as the balance of risks. This reaffirms market expectations that the Fed will not raise rates further. The Fed funds futures market is indicating that the Fed will maintain the status quo in December and is even pricing in cuts starting in May 2024.
This, in turn, is keeping the yield on the benchmark 10-year U.S. Treasury note near a two-month low and could limit any meaningful USD recovery from Tuesday’s August 31 low. Otherwise, the hawkish stance of the Reserve Bank of Australia (RBA) should limit losses for the AUD/USD pair.
The minutes of the RBA’s November 7th meeting released on Tuesday showed that the board members saw a risk that inflation expectations could rise if interest rates were not raised. The RBA also warned that inflation was still too high, and the forecast for inflation to fall within the 2%-3% target range was based on one or two rate hikes.
In addition, RBA Governor Michele Bullock said on Tuesday that inflation will be a key challenge for the economy over the next year or two, setting the stage for further policy tightening. Therefore, it will be prudent to wait for strong follow-through selling before confirming that the recent rally in the AUD/USD over the past two weeks has run out of steam and positioning for a further bearish move.
Market participants will now turn their attention to the U.S. economic calendar, with the release of the usual weekly jobless claims, durable goods orders and the revised Michigan consumer sentiment index later in the early North American session.
This, along with US bond yields, will influence the USD’s price momentum and provide some impetus to the AUD/USD pair. Traders will also look to the broader risk sentiment for short-term opportunities ahead of Thursday’s flash PMI data from Australia.
From a technical perspective, the AUD/USD pair was rejected on Tuesday near the 0.6590 confluence of the 200-day simple moving average (SMA) and the 50% Fibonacci retracement level of the July-October decline. The subsequent decline warrants caution for bullish traders. However, positive oscillators on the daily chart support the prospects for some dip buying near the 38.2% Fibonacci level, around the 0.6515 level.
This is closely followed by the psychological 0.6500 level and the 100-day SMA, currently at 0.6490, which if breached decisively, could shift the bias in favor of the bearish traders. Spot prices may then accelerate the slide towards the 23.6% Fibo level, in the 0.6420-0.6415 region, en route to the 0.6400 level. Some follow-through selling could then leave the pair vulnerable to a test of the 0.6340-0.6335 support zone, before eventually falling to the 0.6300 round figure and the year-to-date low, around the 0.6270 area touched in October.
On the other hand, the bulls will have to wait for a sustained break above the 0.6590 confluence hurdle, above which the AUD/USD could test the 61.8% Fibo level, around the 0.6650-0.6655 area. Sustained strength above the latter will be seen as a fresh trigger for bullish traders, allowing spot prices to reclaim the 0.6700 level for the first time since early August.