AUD/USD trades marginally higher in the 0.6610s on Wednesday prior to the release of market-moving inflation data from the US. Later this afternoon, AUD/USD could face further volatility when the US Federal Reserve (Fed) concludes its June policy meeting and releases its latest set of economic forecasts.
The Fed is responsible for setting interest rates in the US, and these, in turn, impact the value of the US Dollar. Higher interest rates cause an appreciation in the USD due to investors reaping higher returns by parking their money in the US; the opposite is true for lower interest rates.
Whilst the Fed is not expected to change its interest rates at the June meeting, the contents of its accompanying statement; the answers given by the Fed Chairman Jerome Powell at the press conference afterwards, and any changes made to the Summary of Economic Projections (SEP) can and probably will influence AUD/USD.
Markets expect the Fed to change its projections of the future course of its interest rate, or “dot-plot”, from forecasting three 0.25% rate cuts in 2024 to less – possibly even just one, according to strategists at Societe Generale.
Such a revision would probably support the USD and weigh on AUD/USD. Any mention of delaying interest rate cuts in the statement or from J Powell might also weigh on the pair.
The Fed’s base interest rate, the Fed Funds Rate is currently 5.25% - 5.50% whilst the Reserve Bank of Australia’s (RBA) policy rate is 4.35%. This would seem to marginally favor the USD over the AUD (bearish for AUD/USD). Due to higher inflation in Australia, however, the RBA, is the last G10 reserve bank expected to cut interest rates, with most analysts not seeing a cut until 2025. The Fed, meanwhile, is slightly more than 50% likely to cut interest rates in September at the time of writing and almost 70% likely by November. The outlook, therefore, suggests US rates will fall, closing the differential – something that is positive for AUD/USD.
US Treasury benchmark 10-year bond yields meanwhile – a measure of inflation expectations and the strength of the US economy – lie at 4.40% compared to Australia’s 4.30%. This overall marginally preferences the USD over the AUD, all other things being equal.