29th July 2021 - AUD/USD pauses post Fed recovery below 0.7400, seeks fresh clues

Market Headlines

Markets were slightly ruffled by the FOMC, which indicated continuing economic improvement but offered no explicit tapering signal. The S&P500 is up 0.1%, and bond yields and the US dollar are slightly lower. US 2yr treasury yields are 1bp lower at 0.20%, after spiking briefly to 0.22% post-FOMC, while the 10yr yield rose from 1.23% to 1.27% ahead of the FOMC, but fell to 1.23% afterwards, probably reflecting some disappointment in the absence of a tapering signal. Commodities, Brent crude oil futures rose 0.2% to $75, copper fell 1.5%, and gold rose 0.4%. Iron ore fell 1.0%.

The FOMC said it "has made progress toward" its goals, and will "will continue to assess progress in coming meetings", indicating it is moving closer towards tapering bond purchases but is not ready to start yet. The statement noted that the "with progress on vaccinations…indicators of economic activity and employment have continued to strengthen." On inflation, it reiterated that prices have risen, but are "largely reflecting transitory factors." Chair Powell, in his press conference, said the labour market "has a ways to go" but also acknowledged that inflation has been hotter than expected and may remain elevated before moderating. Overall, the market was slightly disappointed that there was no strong hint that a tapering decision could be announced at the annual Jackson Hole symposium in August.

Overnight Currency Range

AUD/USD 0.7317 0.7381

EUR/USD 1.1772 1.1849

GBP/USD 1.3845 1.3912

USD/JPY 109.74 110.29

NZD/USD 0.6900 0.6968

USD/CAD 1.2523 1.2604

USD/CNH 6.4860 6.5272

AUD/JPY 80.64 81.13

AUD/NZD 1.0569 1.0608

AUD Thoughts

AUD/USD edges higher around 0.7370 as the FOMC-led boost to the north stalls during early Thursday morning in Asia. The Aussie pair earlier benefited from the US dollar broad weakness on the Fed’s refrain from discussing taper but the coronavirus Delta variant fears at home and abroad tame the upside momentum of late. Also challenging the bulls could be sluggish equities and cautious sentiment as US policymakers hold procedural votes on President Joe Biden’s infrastructure spending plan.

The US Dollar Index (DXY) dropped to a 12-day low following the Fed outcome, printing a three-day fall, which in turn favoured Antipodeans but couldn’t help Wall Street. Further, the US 10-year Treasury yields seesaws around 1.23% and marked no major reaction to the news.

It’s worth noting that the AUD/USD prices paid a little heed to Australia Q2 Consumer Price Index (CPI) data earlier on Wednesday as they matched firmer forecasts. The reason could be linked to the covid concerns emanating mainly from New South Wales that marked a fresh high, unfortunately, of infections since March 2020, pushing PM Scott Morrison to announce an additional local relief package.

Moving on, updates from the US Senate could offer immediate direction but Australia Import and Export Price Index data for the second quarter (Q2) will be the key during the Asian session. Following that, the preliminary readings of US Q2 GDP should be eyed for fresh impulse. Above all, sentiment-related headlines, mainly surrounding covid, stimulus and China, will be crucial as Fed and RBA both have recently disappointed markets.

Event Risk Data Today

Australia: Markets are looking for a 1.0% lift in the Q2 import price index on higher energy prices. Meanwhile, the export price index is set to surge 9.0% on sharply higher commodity prices.

New Zealand: Markets expect to continue seeing an improvement in expectations of own activity in the July ANZBO business confidence survey. This is despite the disruptions we’ve experienced on the Trans–Tasman bubble. Inflation expectations will again be worth watching especially after June’s firm CPI release and given the recent strength in demand.

Euro Area: Ahead of the July update, economic confidence is sitting at a two-decade high (market f/c: 118.4).

US: Markets are looking for GDP to expand 9.0% annualised in Q2. In the three months to June, the US economy improved materially as the vaccine drive took effect and confidence amongst both households and businesses strengthened. Though consumer spending on goods has topped out, spending on services is on the rise. Housing investment meanwhile has been, and will remain, a significant positive. Investment by the business sector is similarly poised to contribute sustainably. Initial jobless claims are expected to fall to 385k, with last week’s uptick a temporary aberration from an established downtrend. Pending home sales are expected to rise by 0.2% in June, with lower mortgage rates dominating the effect of elevated prices.

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