Forex Market: AUD/USD slips in cautious trade as focus sets on Federal Reserve’s policy decision

AUD/USD was a notch weaker on Tuesday, as market players abstained from opening big positions ahead of the Federal Reserve’s monetary policy decision later this week, which could provide guidance on whether the central bank will begin tapering stimulus.

According to Commonwealth Bank of Australia strategist Joe Capurso, a suggestion that tapering could begin soon would support the US Dollar.

On the other hand, according to Steve Englander, head of G10 FX research at Standard Chartered, the Fed’s assessment of a sharp but probably transitory surge in inflation will also be closely watched.

“We expect that Fed Chair (Jerome) Powell will convey more patience than many recent Fed speakers about bringing inflation lower, as long as domestic economic conditions still point to labour market slack,” Steve Englander wrote in a client note, cited by Reuters.

“A dovish lean by Powell will likely push up longer-term interest rates … because of a rally in inflation breakevens and a reduction in market fears about slower medium-term growth. Paradoxically, this is likely to be dollar-negative because global uncertainty on the policy response to higher inflation would be reduced,” Englander added.

Additionally, market risk sentiment was dampened by surging new COVID-19 infections, which raised some concerns that more restrictive measures could disrupt global economic recovery.

“The Covid-19 situation in Australia will remain a firm headwind to AUD in the near term,” Commonwealth Bank of Australia strategists wrote in an investor note.

Australia’s most populous state of New South Wales reported on Tuesday the highest daily increase in new infections in 16 months, which could lead to more rigorous restrictions or an extension to current lockdown measures.

“The delta variant continues to dominate our client discussions, and markets are pricing in a pessimistic view given reflation trade underperformance,” J.P. Morgan strategists wrote in a research note.

As of 8:22 GMT on Tuesday AUD/USD was retreating 0.53% to trade at 0.7340, while moving within a daily range of 0.7338-0.7389. Last week the Forex pair slipped as low as 0.7289, which has been its weakest level since November 24th 2020 (0.7283). The major currency pair has retreated 2.11% so far in July, following another 2.99% drop in June.

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 -16.94 basis points (-0.1694%) as of 8:15 GMT on Tuesday, down from -15.3 basis points on July 26th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7367
R1 – 0.7403
R2 – 0.7427
R3 – 0.7463
R4 – 0.7499

S1 – 0.7343
S2 – 0.7307
S3 – 0.7283
S4 – 0.7259