AUD/USD Upbeat Ahead of the Fed

Fed Policy Decision

The US central bank dominates today's economic calendar, as it could deliver its first rate hike since 2018, with the decision due at 18:00 GMT. There had been some debate as to the size of the move, but Chair Powell adopted a less aggressive stance, saying that he is "inclined to propose in support of 25 basis point rate hike" during his Congress testimony at the beginning of the month. ^[1]

Investors will have a lot to unpack, as they will be combing through the policy statement language and the updated staff projections, which include the closely watched dot-plot – with officials' view on the appropriate rate path. Furthermore the decision is followed by Mr Powell's press conference (18:30 GMT), while markets will also be looking for any information around the normalization of the Fed's balance sheet.

Reserve Bank of Australia (RBA)

The Fed has made a very aggressive tightening pivot late last year, in order to combat surging inflation, which is now its top priority. Its Australian counterpart however, is still far behind in the policy normalization path, although it has been making steps forward.

In the first policy decision of the year in February, the RBA announced the end of its asset purchases program, stressing that this move does not imply a near-term increase in interest rates. The official cash rate (OCR) had stayed at 0.1%, with the Board "prepared to be patient". ^[2]

This month policy meeting did not produce anything noteworthy, as the bank reiterated its patient stance on rates ^[3], but last week, Governor Lowe made a hawkish shift, saying that "it is plausible that the cash rate will be increased later this year". ^[4]

AUD/USD

Today we see renewed optimism around the negotiations between Russia and Ukraine, after Ukrainian President Zelenskyy noted that "the positions in the negotiations sound more realistic' ^[5], in contrast with prior comments by Mr Putin, who had commented that Kiev is not showing a serious commitment to finding mutually acceptable solutions. ^[6]

Market sentiment was also helped from today's statement by China's financial stability and development committee, as Chinese new agency Xinhua. The committee, among other things, said that relevant authorities should "actively introduce market-friendly policies".

Risk-on sentiment is prevalent today and along with the recovery in oil prices, AUD/USD rebounds from it poor start to the week. It tries to surpass the EMA200 (black line) which would put immediate bias on the upside, but fresh catalyst would be likely needed for a rise beyond key 0.7300 region, where the 200Days EMA and the descending trend-line for this month 2022 high coincide.

On the other hand, current levels may create exhaustion that could produce new month lows (0.7164). The downside contains some key areas of support that can assist the Aussie, such as the Daily Ichimoku Cloud (0.7140-00).

In any case, the pair's trajectory will be likely determined by the outcome of the Fed's meeting today, which can spur volatility and produce outsized moves. Apart from that, Thursday starts with the release of Australia's Employment figures.