- AUD/USD is trapped between support and resistance following Fed volatility.
- Evergrande risks have started to fade but so too has the bid in the Aussie.
AUD/USD is a touch higher as we approach the open of the Asian session for Thursday. AUD/USD, at 0.7240, is 0.11% higher on the day as the Evergrande risk fades while the Federal Reserve moves back to the fore.
The outcome of Wednesday’s two-day Federal Open Market Committee meeting was hawkish. However, risk assets initially rallied on the statement, potentially owing to the signs that the corporate debt problem in China will be contained and isolated to China. Still, the surprise moves in asset classes were unusual and took a while to correct before the US dollar could shine through the fog.
In a 65 pip round trip, AUD/USD initially rallied through a 50% mean reversion target on the daily charts before settling back to where it was before the FOMC statement was released and towards the prior days close down at 0.7232.
The takeaways were that the Fed could announce a taper as soon as the next meeting, without much reliance on more improvements in the jobs market. Powell said there was no need for a blockbuster Nonfarm Payrolls next time around. This gave the greenback a huge and much-needed lift and sank AID/USD. Moreover, the Fed is now predicting rate rises to come sooner than first anticipated as per the dots.
”Half of Fed policymakers see lift-off in fed funds rate from zero in 2022, vs. 7 of 18 in June forecast; all but one see liftoff by end-2023 (vs. 13 in June).”
Evergrande contagion risks fade
Soon after the Chinese central bank injected cash into the banking system, temporarily soothing fears of imminent contagion from the debt-laden property developer, Evergrande, it was announced it had agreed to settle interest payments on a domestic bond on Wednesday.
Additionally, Fed’s Powell says China’s corporate debt problem can draw no parallels to the US and he feels that it is an isolated problem for China and that there is no direct exposure to the US.
US jobs eyed
All eyes will be back on data now to determine when the Fed will indeed start to taper and move towards lift-off in rates.
”As the virus risk gradually fades, FOMC participants expect the labour market will continue to improve, with unemployment set to fall to 3.5% in 2024, versus 5.2% previously,” analysts at ANZ Bank argued,
”All up, the Fed’s projections show an economy that is undergoing a robust economic recovery that will justify a gradual normalisation in policy rates.”
AUD/USD technical analysis
The 50% mean reversion target was met during the Fed event and now the focus is back on the downside. However, some consolidation would be expected to play out which spells sideways markets into the end of the week: