Forex Market: AUD/USD off two-week peak as RBA flags possible rate pause in April, FOMC meeting outcome in focus

AUD/USD came off recent two-week high on Tuesday, after the minutes of the Reserve Bank of Australia’s latest policy meeting showed the central bank would reconsider the case for a pause next month to reassess macroeconomic conditions.

RBA policy makers said monetary policy in Australia was already in restrictive territory amid an uncertain economic outlook and persistently high inflation.

The bank’s board also underscored that while the headline inflation had likely reached a peak, it was not expected to return to the target range of 2% to 3% until mid-2025.

Meanwhile, the US Dollar was hovering above a five-week trough against a basket of major peers amid expectations that the Federal Reserve may be prompted to pause hiking rates at its policy meeting this week.

“Volatility in rates and the broader asset markets has been extraordinary recently,” John Velis, Forex and macro strategist for the Americas at BNY Mellon, was quoted as saying by Reuters.

“That has clouded the picture for the March (Fed) meeting and beyond. One consequence has been a substantial repricing … regarding future rate expectations,” Velis added.

Futures markets are now pricing in a 25% chance that the Fed will probably leave rates on hold at the conclusion of its policy meeting tomorrow and there is a 75% probability of a 25 basis point rate increase.

Market sentiment remained frail, as investors continued to assess the impact from recent banking stress. Still, news of a planned takeover of Credit Suisse by UBS over the weekend introduced certain relief.

As of 10:03 GMT on Tuesday AUD/USD was retreating 0.48% to trade at 0.6683. Yesterday the major Forex pair went up as high as 0.6730, which has been its strongest level since March 7th (0.6748).

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 -105.5 basis points as of 9:15 GMT on Tuesday, down from -98.9 basis points on March 20th.