- AUD/USD bears are on course for a deeper test of demand if dollar keeps it up.
- Focus will be on Fed speakers and Powell for the week ahead.
AUD/USD will open this week on the backfoot following constant squeezing of dollar shorts in the wake of a more hawkish stance at the Federal Reserve. AUD/USD ended trade on Friday at 0.7478 and near to the lows of the day, week, month and year at 0.7476.
The US yield curve is the catalyst that flattened further when St Louis Fed President Bullard, a potential prelude to this week's series of the Federal speakers, reinforced the hawkish tilt of the June meeting. The yield on the US 10-year note fell 6.6bps to 1.438%, while the 2-year note lifted 4.5bps to 25.4bps.
It was risk-off from the get-go and the S&P 500 closed lower by 1.3% and the Dow dropped1.6%, while earlier, the Euro Stoxx 50 was down 1.8% and the FTSE 100 fell 1.9%.
''It is possible that the Fed did too good a job in recent months in persuading the markets that it was wedded to the view is that all inflationary pressures would be transitory and that it was committed to average inflation targeting,'' analysts at Rabobank argue.
''Even though the inflation debate has been raging in the market all year, the disruption to asset prices sparked by the June 16 FOMC meeting is suggestive of how confident the market had been that the Fed would stick to its previous script. Instead Chair Powell this week warned that 'inflation could turn out to be higher and more persistent than we expect. ''
Meanwhile, on Friday, St Louis Fed President Bullard was the first post-FOMC meeting speaker and was an important one for markets.
Bullard was right to the point and said that he forecasts core PCE at 3.0% for the end of this year and 2.5% for the end of 2022, which he believes would justify a rate tightening cycle starting late next year.
However, analysts at ANZ bank said that ''a simple linear calculation shows that core inflation needs to fall back to 0.2% m/m immediately and stay there for the next 18 months if inflation is to converge on the Fed’s 2.1% forecast for Q4 next year.''
''That looks unlikely at present given current economic momentum and supply and demand imbalances. So the risks clearly point to inflation staying elevated for longer, making the Fed’s target more difficult to achieve.''
''If inflation doesn’t come down in coming months, there is a real risk that when the Fed meets in September and updates its forecasts again, inflation forecasts for next year will be revised up and more members will pencil in rate rises for 2022. That would also suggest that tapering may have to be more rapid than the USD10bn per month from January the consensus expects and it could possibly start earlier.''
Among other Fed speakers, Fed chair Jerome Powell speaks where traders will be on the lookout to see whether or not he will maintain the 2022 rate rise mantra.
From here out, inflation data will be important but from a domestic front, the release of the Retail Sales will be a focus for the markets today. Also, China’s benchmark lending rate is set to remain unchanged at its June fixing following the Fed.
AUD/USD technical analysis
The price is testing an old area of the structure that could give out to the next layer before correcting to the current resistance.
In this order, the next resistance would be a 38.2% Fibonacci retracement of the bearish impulse.
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