Forex Market: AUD/USD lingers near 27 1/2-month lows ahead of FOMC decision, RBA rate hikes could slow

AUD/USD was trading in proximity to last Friday’s 27 1/2-month low of 0.6670 on Tuesday, as the US Dollar remained strong on expectations of another aggressive interest rate hike by the Federal Reserve this week in an attempt to curb red-hot inflation.

The greenback also received support from higher bond yields. The yield on US 2-year Treasuries went up as high as 3.970% overnight for the first time since November 2007.

Meanwhile, minutes of the Reserve Bank of Australia’s September meeting showed that Board members saw a case for slowing the pace of rate hikes as the cash rate neared more normal levels.

“All else equal, members saw the case for a slower pace of increase in interest rates as becoming stronger as the level of the cash rate rises,” the minutes stated.

Higher interest rates’ full effect on mortgage payments is still due to be felt, according to the minutes, while the broader effects on activity and inflation are to become apparent in time.

Markets are pricing another 50 basis point rate hike by the RBA in October, in part to keep up with the Federal Reserve’s tightening cycle.

In terms of wage growth, board members said the pace of wage increases remained consistent with the RBA’s 2%-3% inflation objective.

As of 8:58 GMT on Tuesday AUD/USD was edging down 0.26% to trade at 0.6709. Last week the major Forex pair went down as low as 0.6670, which has been its weakest level since June 1st 2020 (0.6648).

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 -68.1 basis points (-0.681%) as of 8:15 GMT on Tuesday, down from -60.6 basis points on September 19th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.6711
R1 – 0.6750
R2 – 0.6773
R3 – 0.6811
R4 – 0.6850

S1 – 0.6688
S2 – 0.6649
S3 – 0.6626
S4 – 0.6603