AUD/USD downside continues, now in 0.7130s after hawkish Fed’s Waller comments

Recent downside momentum in AUD/USD has continued throughout US trading hours spurred primarily by a broad pick up in USD strength in wake of hawkish Fed commentary. The pair is now trading in the 0.7130s, down about 50 pips or 0.7% on the session and now down about 1.2% from earlier weekly highs hit in the 0.7220s on Thursday after the Fed’s monetary policy announcement.

Influential Fed board member Christopher Waller said that the "whole point" of the Fed's decision to accelerate the pace of its QE taper was to make the March Fed meeting "live" for a first rate hike. A hike in March, he said, was now his base case, although he could see the hike pushed out to May. According to the CME Fed Watch, markets are now pricing a roughly 50% chance that the Fed hikes rates by 25bps to 0.25-0.50% from 0.0-0.25% in March.

The comments come after the Fed doubled the pace of its QE taper earlier in the week, the new dot plot showed consensus expectations on the FOMC was for three rate hikes in 2022 and Chair Jerome Powell outlined a bullish view on the economy and labour market. Waller and other Fed speakers who have appeared (Mary Daly) since the Fed meeting stuck to this bullish economic view, but Waller was much more explicit on the potential timing of future Fed policy moves.

The Aussie’s losses on Friday, which have also been compounded by a broadly risk-averse market mood, have taken AUD/USD back to roughly in line with its pre-Fed meeting levels. Bears will likely be eyeing a potential test of this week’s lows under 0.7100 if the dollar can continue to strengthen into next week on hawkish Fed vibes and if risk appetite remains ropey.