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Australian Dollar US Dollar (AUD/USD) Exchange Rate Slumps Ahead of Fed Meeting and AU Inflation

US Dollar Exchange Rates

Rising Business Confidence Fails to Boost Australian Dollar US Dollar (AUD/USD) Exchange Rate

While the NAB business confidence index strengthened markedly on the month this was not enough to prevent the Australian Dollar to US Dollar (AUD/USD) exchange rate from slumping sharply.

Demand for the Australian Dollar (AUD) has generally weakened in the wake of the weekend as a result of declining market risk appetite and the recovery of the US Dollar (USD).

As the Trump administration continues to take a more protectionist stance fears of a potential trade war have mounted, to the detriment of risk-sensitive currencies such as AUD.

Even though Australian business confidence showed signs of improvement in December doubts remain over the underlying health of the domestic economy, limiting the upside potential of AUD exchange rates.

With investors also starting to brace for tomorrow’s fourth quarter consumer price index data support for the Australian Dollar was naturally limited.

Hopes for Hawkish Federal Reserve Meeting Shore Up USD Exchange Rates

Bets over the possibility of the Federal Reserve taking a more hawkish stance at its January meeting have weighed heavily on the AUD/USD exchange rate.

December’s personal consumption expenditure report encouraged hopes that the Fed will raise interest rates again sooner rather than later, holding steady at 1.5% on the year.

While this is still some way short of the Fed’s 2% inflation target investors nevertheless viewed this as a positive signal for the monetary policy outlook, especially as the latest Dallas Fed manufacturing activity index also bettered forecast.

All in all, the underlying fundamentals of the US economy appear strong at this juncture, in spite of the uncertainty surrounding the ultimate impact of the Trump administration’s policies and approach to trade.

With the recent selloff in USD looking exhausted there was little to prevent the AUD/USD exchange rate coming under pressure on Tuesday.

Stronger Australian Inflation Forecast to Limit AUD/USD Exchange Rate Downside

Further softening could well be in store for the AUD/USD exchange rate if the latest Australian inflation data fails to impress.

Forecasts point towards a solid uptick in the headline consumer price index on the year, however, which is expected to accelerate from 1.8% to 2.0%.

This would represent an encouraging return to the Reserve Bank of Australia’s (RBA) target range, albeit a fairly tentative one.

As Justin Smirk, research analyst at Westpac, noted:

‘Core inflation is still at the bottom of the RBA target band and the expected moderation in dwelling purchases price inflation through 2018, along with consumer goods still captive to a competitive deflationary cycle, it is hard to see core inflation breaking higher.’

With the RBA looking unlikely to shift to a more hawkish policy outlook for some time to come, even if inflation surprises to the upside, any boost to the Australian Dollar is likely to be limited.

Wider market concerns are expected to keep AUD exchange rates under some degree of pressure in the near term, unless the Fed proves unexpectedly dovish at its policy meeting on Thursday.