The Australian dollar is sharply lower on Thursday after the Fed policy meeting a day earlier. In the European session, AUD/USD is trading at 0.6514, down 0.78%. Earlier, the Australian dollar dropped as low as 0.6508, its lowest level since November 20.
Powell says March rate cut unlikely
The Federal Reserve met on Wednesday and there was no surprise as the Fed left interest rates unchanged for a fourth straight month. The rate-tightening cycle has largely achieved its aim of lowering inflation and there’s little doubt that the Fed is done with tightening. Fed Chair Jerome Powell pivoted at the December meeting and signalled that rate cuts were coming in 2024. The markets proceeded to price in a March cut but the Fed has been pushing back on these expectations, even though some US economic releases were stronger than expected.
The Fed’s pushback has forced the markets to pare expectations of a March cut, from over 80% in December to 48% prior to the Fed meeting. In the aftermath of the meeting, the odds of a March cut have fallen even further, to 35% according to the CME FedWatch tool. The markets are now eyeing the May meeting and have widely priced in an initial rate cut at that time.
The rate statement from yesterday’s meeting noted that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward two per cent.” This was a strong signal to the markets not to expect a rate cut in March.
This stance was reiterated by Powell in his press conference. Powell said it was unlikely that the Fed would lower rates in March, although he did not rule out the possibility completely. The Fed Chair noted that inflation had declined without dragging down the economy or causing high unemployment, a message to the markets that he was not in any rush to start chopping rates.
Australian data is pointing to a weakening economy, just ahead of the Reserve Bank of Australia’s meeting on February 6. Inflation eased to 4.1% y/y in the fourth quarter, down from 5.4% in Q3, while retail sales sunk in December with a decline of 2.7% m/m. The RBA is virtually certain to pause next week and is expected to start to trim rates later this year.
AUD/USD Technical
- AUD/USD is testing support at 0.6538. Next, there is support at 0.6510
- There is resistance at 0.6581 and 0.6609
