Australian dollar recovers despite soft GDP

Australian GDP declines in Q3

After touching a 13-month low on Tuesday, the Australian dollar has reversed directions and moved higher. In the European session, AUD/USD is trading at 0.7155, up 0.37% on the day.

The Aussie is in positive territory despite a weak GDP for the third quarter. Investors were clearly relieved that the decline of -1.90% q/q was much better than the consensus of -2.70%. This suggests that the Q3 lockdowns due to the spike in Covid cases did not cause as great a downturn as expected. There are encouraging signs that Q4 growth will rebound. House prices rose for a 14th successive month, and the Manufacturing PMI improved in November, rising from 54.8, up from 50.4 beforehand.

Fed Chair Jerome Powell showed a hawkish side in his testimony before a Senate committee. Powell retired the word “transitory” from his description of inflation, a label that the markets essentially threw in the dustbin months ago. Powell stated that FOMC members would discuss accelerating the unwinding of the taper scheme at the December meeting. The abrupt change in stance by Powell has added to the uncertainty in the markets, which have been shaken by the spread of the Omicron variant of Covid.

Powell’s remarks on the Hill appear to indicate a slight narrowing of the gap between the Fed’s view and market expectations. The markets expect an acceleration of tapering in January, with Goldman Sachs stating in a note last week that it expects a doubling of the trim, from USD 15 billion to 30 billion. The Fed is nowhere near the market pricing of three rate hikes in 2022, but if inflation remains red-hot, we can expect Powell to signal that the Fed is prepared to raise rates next year. With the Fed signalling further tightening, the dollar outlook for early 2022 is a bright one.

AUD/USD technical

• There are resistance lines at 0.7226 and 0.7331.

• AUD/USD is testing support at 0.7065. Below, there is support at 0.7009, which is protecting the symbolic 70 level.