AUD/USD muted on FOMC, but on the back foot as we head towards key unemployment data event

AUD/USD has held steady following the outcome of the Federal Reserve Open Market Committee minutes which showed that theFederal Reserve policymakers were cautiously optimistic about their ability to hold interest rates steady this year, even as they acknowledged new risks caused by the coronavirus outbreak. "Participants generally saw the distribution of risks to the outlook for economic activity as somewhat more favourable than at the previous meeting," the Fed said in the minutes of the Jan. 28-29 meeting. It went on to say the current stance of monetary policy was likely to remain appropriate "for a time." 

More here: FOMC minutes: Policymakers expect economic growth to continue at a moderate pace

AUD/USD has been unable to maintain the bid this week following an initial break to the upside on Monday. The Reserve Bank of Australia has done little to prop-up the currency in the less dovish rhetoric of late and instead, the US dollar is dominating the G10s, rallying to around a 45-month high. More on that here: US Dollar Index Price Analysis: DXY unstoppable ahead of FOMC, trading near 45-month highs

What markets are concerned for, indeed, are the risks of the coronavirus and what ammunition the RBA has left. This is weighing on the AUD. Casting minds back, he RBA Board discussed “risks associated with very low-interest rates, specifically:

Internationally, concerns had been raised about the effect of very low interest rates on resource allocation in the economy and their effect on the confidence of some people in the community, notably those reliant on savings to finance their consumption. A further reduction in interest rates could also encourage additional borrowing at a time when there was already a strong upswing in the housing market.

We will have the next key data set, Unemployment, from the Aussie economy and Governor Lowe has been clear about what economic developments would be needed to get the Bank back to easing. In his speech on 5th February, the Governor of RBA concluded that − given the cost of low interest rates − things would have to get worse for the RBA to ease again.

To be specific, Lowe said:

If the unemployment rate were to be trending in the wrong direction and there was no further progress being made towards the inflation target, the balance of arguments would change. In those circumstances, the Board would see a stronger case for further monetary easing.

In the minutes, they said:

The Board would continue to monitor developments carefully, including in the labour market, and remained prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.

In conclusion, if there is a deterioration in inflation, unemployment and heightened risks associated with the coronavirus, AUD can slide as prospects for a rate cut fro the rBa increase. 

AUD/USD levels