Forex Market: AUD/USD extends gains on hopes Omicron may not be severe, RBA keeps policy settings unchanged

AUD/USD extended gains from the previous trading day on Tuesday as market players bet that the Omicron variant of COVID-19 would probably be mild.

The top US infectious disease official Anthony Fauci told CNN on Sunday that “it does not look like there’s a great degree of severity” so far.

Meanwhile, the Reserve Bank of Australia introduced no policy changes on Tuesday and noted that inflation pressures in Australia remained lower compared to those observed in many other countries amid modest wages growth.

The central bank continued with its plan to maintain its bond-purchasing program at a pace of AUD 4 billion per week until at least mid-February 2022, when it will review the operation.

At the same time, the RBA official cash rate was kept intact at a record low level of 0.10% during the bank’s policy meeting earlier on Tuesday, in line with market expectations.

RBA policy makers reiterated that the cash rate would not be raised until actual inflation in Australia is sustainably within the 2% to 3% target range.

“This will require the labor market to be tight enough to generate wages growth that is materially higher than it is currently. This is likely to take some time and the board is prepared to be patient,” the RBA said.

As far as the Omicron strain of the coronavirus is concerned, the central bank said it would probably not derail the country’s economic recovery.

“The impact of Omicron ultimately holds the key to the policy direction in the near term, but the RBA has clearly positioned itself among those central banks (like the Fed) that do not currently see the new variant as likely to truly dampen the recovery and policy plan,” ING analysts wrote in an investor note.

“With still a lot of short positions to be unwound, this is a notion that can continue to offer support to the Aussie dollar in the coming weeks.”

As of 11:17 GMT on Tuesday AUD/USD was gaining 0.66% to trade at 0.7098. Last Friday the Forex pair slipped as low as 0.6993, which has been its weakest level since November 2nd 2020 (0.6991). The major currency pair has retreated 0.39% so far in December, following another 5.22% loss in November.

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 -28.43 basis points (-0.2843%) as of 9:15 GMT on Tuesday, down from -26.0 basis points on December 6th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7034
R1 – 0.7072
R2 – 0.7092
R3 – 0.7130
R4 – 0.7168

S1 – 0.7014
S2 – 0.6976
S3 – 0.6955
S4 – 0.6935