Australian Dollar gains momentum amid US Dollar weakness, FOMC minutes in focus

The Australian Dollar (AUD) has been on a rising trend against the US Dollar (USD) since last week, as the market anticipates another interest rate hike by the Reserve Bank of Australia (RBA) and weighs the impact of the Federal Open Market Committee (FOMC) minutes on the US monetary policy outlook.

The RBA has already increased its official cash rate twice this year, from 0.1% to 0.35%, in response to the strong economic recovery and rising inflation pressures in Australia. The RBA’s latest statement on monetary policy, released on November 5, indicated that the central bank expects the inflation rate to reach 3% by the end of 2023, above its target range of 2-3%.

The market is pricing in a high probability of another 25 basis points rate hike by the RBA in December, which would lift the cash rate to 0.6%. This would widen the interest rate differential between Australia and the US, where the Federal Reserve (Fed) has kept its policy rate near zero and signaled that it would start tapering its asset purchases this month.

Australian Dollar gains momentum amid US Dollar weakness, FOMC minutes in focus
Australian Dollar gains momentum amid US Dollar weakness, FOMC minutes in focus

The RBA’s hawkish stance has boosted the appeal of the Australian Dollar, which is also supported by the robust demand for commodities, especially iron ore and coal, which are Australia’s main exports. The ongoing geopolitical tensions in the Middle East have also lifted the prices of oil and gold, which are positive for the AUD/USD pair.

FOMC minutes to shed light on Fed’s policy outlook

The Fed’s policy outlook, on the other hand, remains uncertain, as the US economy faces headwinds from the surge in COVID-19 cases, supply chain disruptions, and labor market challenges. The Fed announced in its November 3 statement that it would reduce its monthly bond purchases by $15 billion, from $120 billion to $105 billion, starting this month. However, the Fed also reiterated that the tapering process does not imply any change in its interest rate guidance, which is based on the achievement of its inflation and employment goals.

The market is eager to see the FOMC minutes, which will be released on Wednesday at 19:00 GMT, for more details on the Fed’s policy deliberations and projections. The minutes could reveal the degree of consensus or divergence among the Fed officials on the timing and pace of tapering, as well as the conditions for raising interest rates. The minutes could also provide some clues on how the Fed views the recent spike in US Treasury yields, which have reached multi-year highs, reflecting the market’s expectations of higher inflation and faster policy tightening.

The US Dollar Index (DXY), which measures the greenback’s performance against a basket of six major currencies, has been under pressure since last week, as the rise in US bond yields has failed to boost the US Dollar’s appeal. The DXY has fallen below the 105.00 level, after reaching a 16-month high of 106.25 on November 8. The US Dollar has also weakened against the Australian Dollar, which has climbed above the 0.6400 level, after hitting a 10-month low of 0.6286 on November 4.

Key data and events to watch

The AUD/USD pair could face some volatility in the coming days, as both Australia and the US will release some important economic data and events that could influence the market’s expectations of the RBA and the Fed’s policy actions.

  • On Thursday, Australia will publish its employment report for October, which is expected to show a decline of 50,000 jobs and an increase in the unemployment rate from 4.6% to 4.8%, as the lockdowns in New South Wales and Victoria weighed on the labor market. However, the report could also show a rebound in the participation rate and the hours worked, as the restrictions eased in late October.
  • On Friday, Australia will release its retail sales data for October, which is forecast to show a rise of 1.8% month-on-month, after a drop of 1.5% in September. The data could reflect the improvement in consumer confidence and spending, as the economy reopened from the lockdowns.
  • On the US side, the market will closely watch the consumer inflation report for October, which will be published on Thursday at 13:30 GMT. The report is expected to show a jump in the annual core CPI from 4% to 4.3%, the highest level since 1991. The headline CPI is also projected to rise from 5.4% to 5.8%, the highest level since 1990. The data could reinforce the market’s concerns about the persistent and broad-based inflation pressures in the US, and increase the speculation of an earlier and faster rate hike by the Fed.
  • The FOMC minutes, as mentioned earlier, will also be a key event to watch on Wednesday, as they could provide more insights into the Fed’s policy outlook and the factors that could influence its future decisions.

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