AUD/USD advances to over two-week high, 0.6800 mark in sight ahead of the Fed

AUD/USD gains positive traction for the third straight day amid modest USD weakness.
Bets for a 50 bps Fed rate cut and a positive risk tone undermine the safe-haven buck.
China’s economic woes warrant caution for bulls ahead of the crucial Fed policy decision.

Haresh Menghani FXStreet

The AUD/USD pair scales higher for the third straight day – also marking the fifth day of a positive move in the previous six – and climbs to over a two-week high, around the 0.6775-0.6780 region during the early European session on Wednesday. The momentum is sponsored by the emergence of fresh US Dollar (USD) selling, which continues to be weighed down by dovish Federal Reserve (Fed) expectations.

In fact, the markets are currently pricing in a greater chance of an oversized 50 basis points (bps) Fed rate cut move at the end of a two-day policy meeting later today. This keeps a lid on the overnight recovery in the US Treasury bond yields, led by the upbeat US Retail Sales figures. Apart from this, a generally positive tone around the equity markets caps the USD recovery from its lowest level since July 2023 and acts as a tailwind for the AUD/USD pair.

The Australian Dollar (AUD), on the other hand, continues to draw support from the Reserve Bank of Australia's (RBA) hawkish stance. The RBA Governor Michele Bullock reiterated last Thursday that bringing inflation down to the target band of 2%-3% remains the central bank's highest priority and it was premature to contemplate near-term rate cuts as inflation remained too high. This further contributes to the bid tone surrounding the AUD/USD pair.

That said, persistent worries about a slowdown in China – the world's second-largest economy – might hold back traders from placing aggressive bullish bets around the China-proxy Aussie. Investors might also prefer to move to the sidelines and wait for the highly-anticipated FOMC monetary policy decision before positioning for an extension of the AUD/USD pair's recent goodish rebound from the 200-day Simple Moving Average (SMA) support.

Dot Plot FAQs

What is the Federal Reserve “Dot Plot”?

The “Dot Plot” is the popular name of the interest-rate projections by the Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed), which implements monetary policy. These are published in the Summary of Economic Projections, a report in which FOMC members also release their individual projections on economic growth, the unemployment rate and inflation for the current year and the next few ones. The document consists of a chart plotting interest-rate projections, with each FOMC member’s forecast represented by a dot. The Fed also adds a table summarizing the range of forecasts and the median for each indicator. This makes it easier for market participants to see how policymakers expect the US economy to perform in the near, medium and long term.

When does the Federal Reserve publish the “Dot Plot”?

The US Federal Reserve publishes the “Dot Plot” once every other meeting, or in four of the eight yearly scheduled meetings. The Summary of Economic Projections report is published along with the monetary policy decision.

Why is the “Dot Plot” important for markets?

The “Dot Plot” gives a comprehensive insight into the expectations from Federal Reserve (Fed) policymakers. As projections reflect each official’s projection for interest rates at the end of each year, it is considered a key forward-looking indicator. By looking at the “Dot Plot” and comparing the data to current interest-rate levels, market participants can see where policymakers expect rates to head to and the overall direction of monetary policy. As projections are released quarterly, the “Dot Plot” is widely used as a guide to figure out the terminal rate and the possible timing of a policy pivot.

How does data in the “Dot Plot” affect the US Dollar?

The most market-moving data in the “Dot Plot” is the projection of the federal funds rate. Any change compared with previous projections is likely to influence the US Dollar (USD) valuation. Generally, if the “Dot Plot” shows that policymakers expect higher interest rates in the near term, this tends to be bullish for USD. Likewise, if projections point to lower rates ahead, the USD is likely to weaken.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

Markets move fast. We move first.

Orange Juice Newsletter brings you expert driven insights - not headlines. Every day on your inbox.

Editor's Picks

EUR/USD drops to daily lows near 1.1630

EUR/USD now loses some traction and slips back to the area of daily lows around 1.1630 on the back of a mild bounce in the US Dollar. Fresh US data, including the September PCE inflation numbers and the latest read on December consumer sentiment, didn’t really move the needle, so the pair is still on course to finish the week with a respectable gain.

GBP/USD trims gains, recedes toward 1.3320

GBP/USD is struggling to keep its daily advance, coming under fresh pressure and retreating to the 1.3320 zone following a mild bullish attempt in the Greenback. Even though US consumer sentiment surprised to the upside, the US Dollar isn’t getting much love, as traders are far more interested in what the Fed will say next week.

Gold makes a U-turn, back to $4,200

Gold is now losing the grip and receding to the key $4,200 region per troy ounce following some signs of life in the Greenback and a marked bounce in US Treasury yields across the board. The positive outlook for the precious metal, however, remains underpinned by steady bets for extra easing by the Fed.