Forex Market: AUD/USD under pressure as markets price aggressive hikes in interest rates

The Australian dollar remained under pressure on Wednesday due to recent strength of its US counterpart, as markets have moved to price in at least four rate hikes from the Federal Reserve in 2022.

The greenback has remained firm against major peers on the back of surging Treasury yields ahead of the FOMC meeting next week. US 2-year bond yields have already surged above 1%, while 10-year bond yields rose to a fresh two-year high of 1.9%.

“A lot of (Fed) officials left us with hawkish impressions right before going quiet (ahead of the meeting),” NatWest markets’ strategist Jan Nevrusi noted.

“After (Tuesday’s) price action, there is slightly more than one hike priced in for the March meeting, and going into next week, I would imagine it oscillates within the lower end of the 25-50 basis point range.”

Meanwhile, market players are betting the Reserve Bank of Australia (RBA) will need to follow the Fed, despite that RBA officials have on a number of occasions said a rate hike is not likely in 2022.

Markets are now pricing a 77% chance of the RBA raising interest rates to 0.25% as soon as May, while hiking at least five times this year to 1.25%.

A close attention will be paid to Australian consumer inflation figures for Q4, scheduled to be released next week.

“We expect there to be evidence of both demand pull and cost push inflation,” Gareth Aird, CBA’s head of Australian economics, was quoted as saying by Reuters.

“Input costs have risen in part due to supply side bottlenecks, while strong demand will have enabled firms to lift their prices at the consumer level.”

According to Aird, the trimmed mean inflation measure may surge 0.9% during the quarter, or at the sharpest rate since early 2009, while pushing the annual inflation rate to 2.5%.

“If the trimmed mean prints in line with our call it would be a big upside surprise relative to their forecast,” CBA’s Aird said.

“It will be the smoking gun that sees the RBA end the bond buying program at the February Board meeting and drop its forward guidance on the cash rate,” he added.

As of 9:01 GMT on Wednesday AUD/USD was inching up 0.04% to trade at 0.7186, while moving within a daily range of 0.7177-0.7195. The Forex pair has retreated 1.75% since the January 13th high of 0.7314, also a two-month high.

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 -18.44 basis points (-0.1844%) as of 9:15 GMT on Wednesday, down from -17.5 basis points on January 18th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7194
R1 – 0.7217
R2 – 0.7252
R3 – 0.7275
R4 – 0.7299

S1 – 0.7159
S2 – 0.7136
S3 – 0.7101
S4 – 0.7067