Forex Market: AUD/USD eases from two-week highs despite upbeat Australian employment data as Fed’s outlook boosts US Dollar

AUD/USD fell from a two-week high on Thursday, while snapping a four-day streak of gains, after Federal Reserve Chair Jerome Powell’s remarks on economic outlook bolstered US bond yields and unleashed a wave of US Dollar buying.

The Fed kept the target range for the federal funds rate intact at 0%-0.25% at its policy meeting on Wednesday, in line with expectations, and indicated that rates would remain close to zero until at least the end of 2023 when “maximum employment” is achieved and inflation rate is set to “moderately exceed” the 2% inflation objective.

The US Dollar retreated immediately after the policy decision, but later reversed direction, after Fed Chair Powell provided an update to US economic outlook during the press conference. US economy is now expected to contract 3.7% in 2020, compared to a 6.5% contraction forecast in June. At the same time, the rate of unemployment in the country is now projected to surge to 7.6% in 2020, compared to a June projection of 9.3%, before easing to 5.5% in 2021 (vs. 6.5% expected in June).

The yield on US 10-year government bonds went up above 0.7% overnight and triggered broad USD buying.

“It’s the same reaction the market had when Fed Chair Powell introduced a new framework last month, and longer-term yields went up after the announcement. Based on the higher interest rates, I think people are feeling they won’t be able to sell the dollar,” Mitsuo Imaizumi, chief FX strategist at Daiwa Securities, said.

Stronger US Dollar overshadowed an impulse to buy its Australian counterpart after upbeat employment data released out of Australia. An official report showed earlier on Thursday that the number of employed persons had risen by 111,000 in August, while confounding expectations of a drop by 50,000. Meanwhile, the seasonally adjusted unemployment rate unexpectedly dropped to 6.8% in August from a 22-year high of 7.5% in July.

Reserve Bank of Australia has been expecting a surge in the unemployment rate to 10% by the end of 2020.

As of 7:00 GMT on Thursday AUD/USD was retreating 0.52% to trade at 0.7267, after earlier touching an intraday low of 0.7254, or a level not seen since September 11th (0.7252). Yesterday it climbed as high as 0.7345, a two-week high. The major pair has retreated 1.44% so far in September, following five consecutive months of gains.

From macroeconomic perspective, today market players will be paying attention to US housing data at 12:30 GMT. The number of housing starts in the country probably decreased to 1.478 million units in August, according to expectations, from the seasonally adjusted annual rate of 1.496 million in July, also the highest level since February.

Meanwhile, the number of building permits probably rose to 1.520 million in August from an annual level of 1.483 million in July, also the highest level since January.

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 September 11th, probably eased to 850,000, according to market expectations, from 884,000 in the preceding week.

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 9.0 basis points (0.090%) as of 6:15 GMT on Thursday, down from 9.3 basis points on September 16th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7309
R1 – 0.7341
R2 – 0.7376
R3 – 0.7407
R4 – 0.7439

S1 – 0.7274
S2 – 0.7243
S3 – 0.7207
S4 – 0.7171