Forex Market: AUD/USD falls to one-week lows as US stimulus doubts trim risk bets, FOMC meeting eyed

AUD/USD slipped to a one-week low on Tuesday, as doubts regarding the speed and size of US stimulus package prompted market players to avoid risk ahead of the Federal Reserve’s two-day policy meeting.

The US Dollar Index advanced overnight to 90.65, or its highest level since January 20th, and was last up 0.06% on the day at 90.44. According to analysts, the surge was in part due to some unwinding of large short bets. But still, the latest CFTC data showed short USD positions had risen to their highest level in nearly a decade.

For the time being, the market seemed to have entered a holding phase, as investors are expecting to see if President Joe Biden’s $1.9 trillion coronavirus relief package can clear Congress. US Senate Majority Leader Chuck Schumer said that Democrats might attempt and pass much of that package with a majority vote. However, it remains uncertain if their numbers would be enough to override objections from Republicans.

Meanwhile, the Federal Reserve is largely expected to reiterate its commitment to a highly accommodative monetary policy, when it concludes its meeting on Wednesday.

“We expect the Fed to reiterate a dovish policy signal,” MUFG currency analyst Lee Hardman wrote in an investor note.

“The Fed is likely to re-emphasize that it is still too early to talk about slowing the pace of quantitative easing … despite the increased likelihood of bigger fiscal stimulus.”

As of 10:16 GMT on Tuesday AUD/USD was edging down 0.19% to trade at 0.7698, after earlier touching an intraday low of 0.7669, or its weakest level since January 18th (0.7659). The major pair has inched down 0.05% so far in January, following a 4.89% surge in December, or the biggest monthly gain since April 2020.

In terms of economic calendar, today market players will be paying attention to the November report on house prices in the 20 largest US cities due out at 14:00 GMT and to the January report on consumer confidence due out at 15:00 GMT.

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 -2.5 basis points (-0.025%) as of 9:16 GMT on Tuesday, or unchanged compared to January 25th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7714
R1 – 0.7746
R2 – 0.7779
R3 – 0.7811
R4 – 0.7842

S1 – 0.7681
S2 – 0.7649
S3 – 0.7616
S4 – 0.7583