Forex Market: AUD/USD trades near 2020 high as markets expect dovish remarks by Fed Chair Powell at the annual bankers’ conference

AUD/USD held steady in proximity to 2020 high of 0.7276 in early European session on Thursday as Australian business investment reportedly shrank at a lesser-than-anticipated rate in the second quarter, while market players were turning their attention to Fed Chairman Jerome Powell’s speech during the annual central bankers’ virtual conference for hints over a possible change in policy framework.

Investors are speculating that Powell may indicate the Fed will soften its inflation target to allow monetary policy to remain accommodative for a longer period of time.

“If the Fed turns out to be less dovish than many have been thinking, we could see a rally in the dollar,” Kyosuke Suzuki, director of Forex at Societe Generale in Tokyo, said.

Fed’s balance sheet has expanded by almost $3 trillion since the beginning of the coronavirus pandemic.

Meanwhile, the latest macro data from Australia showed private capital expenditure had shrunk at a quarterly rate of 5.9% in Q2, or at a slower pace than expected, as demand was hampered by COVID-19 lockdown restrictions. Future spending plans were scaled back by the corporate sector, but to a lesser-than-expected extent.

“The upshot is that the outlook for capital spending isn’t as gloomy as one would expect in the current environment,” Marcel Thieliant, an economist at Capital Economics, said.

According to Thieliant’s estimate, Australian economy probably shrank at a quarterly rate of 4.5% in Q2, which compares with a prior forecast of a 6.5% contraction. The official GDP report will be released next week.

As of 7:03 GMT on Thursday AUD/USD was edging up 0.10% to trade at 0.7240, after earlier touching an intraday high at 0.7251, or its strongest level since August 19th (0.7276), also an 18 1/2-month high. The major pair has risen 1.37% so far in August, after four straight months of gains.

In terms of economic calendar, today market players will be paying attention to the second US GDP estimate for Q2, scheduled to be reported at 12:30 GMT. It may show that economy contracted at an annualized rate of 32.5% during the second quarter, according to market consensus. The preliminary estimate pointed to a 32.9% GDP contraction in Q2, or the sharpest one on record.

A separate report at 12:30 GMT by the US Labor Department may show the number of people in the country, who filed for unemployment assistance for the first time during the business week ended August 21st, probably eased to 1,000,000, according to market expectations, from 1,106,000 in the preceding week.

And at 13:10 GMT Federal Reserve Chair Jerome Powell is scheduled to speak at the Jackson Hole Economic Policy virtual symposium.

Bond Yield Spread

The spread between 2-year Australian and 2-year US bond yields, which reflects the flow of funds in a short term, equaled 11.9 basis points (0.119%) as of 6:15 GMT on Thursday, up from 11.3 basis points on August 26th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7220
R1 – 0.7252
R2 – 0.7272
R3 – 0.7305
R4 – 0.7337

S1 – 0.7200
S2 – 0.7167
S3 – 0.7147
S4 – 0.7128