Forex Market: AUD/USD rally slows, US bond yields surge on expectations of steeper Federal Reserve rate hikes

Last week’s rally in AUD/USD stalled at the start of the new week as fresh bets on Fed rate hikes supported the US Dollar and US bond yields registered multi-year highs.

Speaking at the annual conference held by National Association for Business Economics, Federal Reserve Chair Jerome Powell noted “the economy is very strong and is well positioned to handle tighter monetary policy.”

Powell also said that the Federal Reserve could “move more aggressively by raising the federal funds rate by more than 25 basis points.”

US 2-year, 5-year, 10-year and 30-year Treasury yields climbed to highs unseen since 2019 on Tuesday.

Fed funds futures are now pricing in a 2/3 chance of a 50 basis point rate hike in May and now expect the benchmark rate to be above 2.5% in 2023.

Meanwhile, at a Walkley Foundation lunch in Sydney earlier on Tuesday, Reserve Bank of Australia Governor Philip Lowe said he hoped the spike in inflation was a one-off event triggered by supply chain disruption and surging oil prices due to Russia-Ukraine military conflict.

“The inflation rate at the moment is 3.5% and will probably go up to 4.5%, who knows, depending on what happens with oil prices,” RBA’s Lowe said.

“Wages are maybe going up high twos, let’s say three, and inflation is 4.5% – that’s a real wage cut of 1.5%, so that will obviously affect people’s budgets.”

According to the RBA Governor, wages are lagging inflation due to state and federal pay raise caps and enterprise agreements that lock in wage increases at a fixed figure for several years.

As of 9:53 GMT on Tuesday AUD/USD was edging up 0.21% to trade at 0.7415. Yesterday the major Forex pair climbed as high as 0.7425, which has been its strongest level since March 7th (0.7441).

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 -58.41 basis points (-0.5841%) as of 9:15 GMT on Tuesday, up from -58.9 basis points on March 21st.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7399
R1 – 0.7425
R2 – 0.7450
R3 – 0.7476
R4 – 0.7501

S1 – 0.7374
S2 – 0.7348
S3 – 0.7323
S4 – 0.7297