AUD/USD creeps upward amid weaker US growth expectations

Daily currency update

The Australian dollar crept upward through trade on Thursday, fighting back and pushing off resistance at US$.6590. Commodity currencies outperformed on the day recovering losses amid a backdrop of improved risk sentiment as fears surrounding the US banking system abated. Equities and risk assets rebounded, and the AUD pushed off session lows to test a break above US$0.6630 late in the domestic session. The AUD tracked downward following US Q! GDP data as markets ignored lackluster growth and focused on elevated inflation indicators. Treasury yields spiked immediately following the data release before a deep dive into activity suggests a contraction in growth and outright recession is just around the corner. As investors unwound USD gains the AUD clawed its way back above US$0.6630 to mark intraday highs at US$0.6635. While still on the back foot signs of a slowdown in the US are growing and our focus turns now to US employment costs and the PCE deflator index as critical markers for inflation and labour market performance ahead of next week’s FED meeting. Near term AUD fortunes hang on Fed guidance. If policymakers signal a pause in rates beyond the May meeting the door opens for an extended AUD recovery.

Key movers

The US dollar finishes Thursday flat as markets fight contrasting drivers, while the Euro weakened, and the JPY slid amid a higher rates backdrop. The USD dollar lurched upward immediately following the Q1 GDP data release as markets attached elevated importance to key inflation indicators. While growth printed below consensus expectations inflation pressures were higher boosting treasury yields and expectations the Fed may be forced to extend its tightening cycle if it is to bring inflation back toward the target. Having forced the Euro back below 1.10 and advancing back above 134 against the Yen the dollar set about giving up gains. Growth projections signal the beginning of a recession and the Fed must now balance the need to depress price pressures while elevating economic activity. Most analysts have priced in a 25-basis point hike next week. The question is, will that be the peak Fed funds rate? Fed guidance will be critical in shaping dollar performance and our attention turn to Tonight’s employment cost index. If wage inflation continues to stabilise there is then added scope for the Fed to pause further rate hikes, while an upward surprise gives policymakers license to stick with the current platform, lifting peak rate expectations. Next week’s Fed policy meeting will prove critical in determining near and medium-term currency direction.

Expected ranges

• AUD/USD: 0.6590 – 0.67230 ▲
• AUD/EUR: 0.5970 – 0.6050 ▲
• GBP/AUD: 1.8680 – 1.9020 ▼
• AUD/NZD: 1.0750 – 1.0850 ▼
• AUD/CAD: 0.8950 – 0.9050 ▼