AUD/USD strong correlation to DXY in focus ahead of FOMC


  • AUD/USD DXY correlation very high, so focus is on the US dollar.
  • The FOMC is the next major event for AUD/USD.
  • Domestically, jobs, RBA Lowe in focus ahead of July RBA.

AUD/USD is a touch higher in North American trade rising 0.34% at the time of writing to 0.7754 from a low of 0.7717 and slightly below the high of the day at 0.7763.

The focus has been on the US dollar this week while investors moved to the sidelines in anticipation of critical events in the US.

US Consumer Price Index and the European Central Bank were occurring earlier today ahead of the Federal Reserve next week. 

The dollar index was down slightly on Thursday in a choppy session in which it alternated between losses and gains.

The greenback had been building on its modest gains ahead of the ECB decision and US CPI data and was up for a third straight day, trading at the highest level since Monday at around 90.30. 

However, the index drifted lower into what was a relatively disappointing reaction in forex markets considering the anticipation leading into the events today. 

Forex volatility is at its lowest since the turn of 2020 and markets were hoping for a boost out of the US dollar today and some direction:

Instead, volatility remains low and traders are sat on their hands awaiting the Fed next week. 

Thursday's news appeared to add little new direction to currency markets and the greenback is stuck in familiar ranges:

DXY hourly chart

''A clean break above 90.325 is needed to set up a test of last week’s pre-NFP high near 90.627,'' analysts at Brown Brothers Harriman argued. 

As for the data, the CPI rose 0.6%, with core up 0.7%, stronger than expected. Also, the US CPI rose 5.0% from a year ago - the largest annual gain in more than a decade

Underlying inflation pressures are firming as the economy reopens but while the surge in year-over-year CPI growth to a 5.0% rate in May was stronger-than-expected, it was not entirely a surprise given the potential changes as the economy re-opens.  

''All in all, strong core data again, but the strength can probably still be viewed as "transitory" to a large extent, due to post-COVID reopening as well as fallout from the semiconductor shortage,'' analysts at TD Securities argued.

''We don't think this report materially changes the Fed's thinking as much of the strength remains confined to reopening-related sectors.''

''... it would take a string of strong CPI reports later this year for the Fed to get concerned about an earlier overshoot.''

However, looking to the Fed, there could be a hawkish surprise that would be expected to underpin the US dollar for the medium term.

FOMC priced too dovish

Low volatility in the forex and rates space suggests that the market is already priced for a fairly dovish tone from the FOMC next week.

However, analysts at TD Securities argue that the tone will probably be slightly less dovish than in April.

''We expect the chair to say that the committee has started discussing a progress-dependent tapering plan while also emphasizing that action will require much more progress.''

''Median projections for core inflation in 2022/2023 will probably rise slightly, consistent with a sizable revision to 2021 being viewed as "largely reflecting transitory factors." The median dot will probably show a rate hike by end-23.''

''A less dovish Fed tone next week would help to stabilize the USD in the very short run.''

''Of course, it may not reverse all of Q2's weakness, but positioning has turned short once again, real rates might be bottoming, and global growth shows signs of pausing. All signs to expect some USD stability as we enter the summer months.''

RBA and domestic factors in focus

Meanwhile, from a domestic front, tension is rising over the Reserve Bank of Australia's policy decision in July.

The RBA is edging towards a key policy shakeup in July.

In the lead-in, we will hear from the RBA's Governor Phillip Lowespeech next week, shortly before Australia's May jobs data.

We will also have RBA’s June minutes next week that will also be read closely.  

Meanwhile, the correlation of changes in DXY and AUD/USD is very high even in historical context.

(Hourly/daily charts)

''We suspect AUD/USD sees choppy price action postFOMC but with fair value 0.84+, are happy to remain long from 0.7680, adding on dips to 0.7580,'' analysts at Westpac said.

''If Lowe gives clear support to those calling for QE tapering and May jobs rebound, the gap to fair value should shrink.''

AUD/USD

Overview
Today last price 0.7754
Today Daily Change 0.0023
Today Daily Change % 0.30
Today daily open 0.7731
 
Trends
Daily SMA20 0.7743
Daily SMA50 0.773
Daily SMA100 0.7728
Daily SMA200 0.7541
 
Levels
Previous Daily High 0.7763
Previous Daily Low 0.7724
Previous Weekly High 0.7774
Previous Weekly Low 0.7644
Previous Monthly High 0.7892
Previous Monthly Low 0.7674
Daily Fibonacci 38.2% 0.7739
Daily Fibonacci 61.8% 0.7748
Daily Pivot Point S1 0.7715
Daily Pivot Point S2 0.77
Daily Pivot Point S3 0.7676
Daily Pivot Point R1 0.7755
Daily Pivot Point R2 0.7779
Daily Pivot Point R3 0.7794

 

 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news

Latest Forex News


Latest Forex News

Editors’ Picks

EUR/USD struggles around 1.19 amid Fed-fueled dollar strength

EUR/USD is under pressure around 1.19, as the dollar remains on the offensive following the Federal Reserve's hawkish decision on Wednesday. The bank is set to debate cutting down its bond buys and signaled raising rates sooner than anticipated. 

EUR/USD News

GBP/USD tumbles below 1.39 on weak UK data, dollar strength

GBP/USD has been extending its decline, sliding under 1.39. UK retail sales disappointed with -1.4% in May and the rapid spread of the Delta variant in the UK is also weighing on sterling. The US dollar remain robust after the Fed's hawkish decision.

GBP/USD News

GBP/USD tumbles below 1.39 on weak UK data, dollar strength

GBP/USD has been extending its decline, sliding under 1.39. UK retail sales disappointed with -1.4% in May and the rapid spread of the Delta variant in the UK is also weighing on sterling. The US dollar remain robust after the Fed's hawkish decision.

GBP/USD News

Ripple fears of a major decline are unwarranted

XRP price remains locked in a range between the psychologically important $1.00 and the neckline of a multi-year inverse head-and-shoulders pattern at $0.76. However, a lack of technical clues leaves frothy forecasts on the sideline until directional confirmation can be gleaned from the charts.

Read more

Where next for markets after the Fed shocker

The Fed surprised markets with an abrupt hawkish shift that has triggered substantial volatility in currency markets. Valeria Bednarik and Yohay Elam explain the surprise, discuss technical level, the next moves in FX and beyond.

Read more

Forex MAJORS

Cryptocurrencies

Signatures