AUD/USD and NZD/USD Fundamental Daily Forecast – Dovish RBA Sinks Aussie Ahead of Key Federal Reserve Meeting

The Australian and New Zealand Dollars are under pressure on Tuesday with the Aussie getting hit the hardest after the Reserve Bank of Australia (RBA) dampened investor hopes for a hawkish pivot ahead of the start of the U.S. Federal Reserve’s two-day policy meeting.

Last week the Australian Dollar was testing its highest level since July 6 as stubborn inflation fueled bets the RBA could raise its benchmark rate as early as next year. However, policymakers pushed back against speculators by coming cross as dovish, leading to today’s sell-off.

At 08:55 GMT, the AUD/USD is trading .7466, down 0.0055 or -0.73% and the NZD/USD is at .7166, down 0.0022 or -0.30%.

In its monetary policy statement, the RBA stressed that inflation was still too low, although it also omitted its previous projection that rates were unlikely to rise until 2024 and dropped a key target for the April 2024 government bond.

RBA Governor Lowe Explains Latest Central Bank Decisions

Reserve Bank of Australia Governor Philip Lowe said the central bank decided to discontinue its yield target on Tuesday because its effectiveness had declined as the economy improved and interest rate expectations changed, Reuters reported.

“Given our forecasts, it is still entirely plausible that the first increase in the cash rate will not be before the maturity of the current target bond – that is, the bond with a maturity date of April 2024,” Lowe said in an opening statement at an online briefing after the RBA’s policy meeting.

“But it is now also plausible that a lift in the cash rate could be appropriate in 2023.”

Lowe said the latest data and forecasts did not warrant a rate rise in 2022.

Earlier, the RBA left its cash rate at a record low of 0.1%, but dropped both a commitment to keeping bond yields low and its projection of no hike in interest rates until 2024.

Focus Now Shifts to Federal Reserve

Traders expect the Fed to announce an aggressive strategy. Not only will they announce the tapering of their massive stimulus, but the futures markets are predicting as many as three rate hikes in 2022.

The Federal Reserve on Wednesday is expected to approve plans to scale back its $120 billion monthly bond-buying program put in place to help the economy during the coronavirus pandemic, while investors will also be focused on commentary about interest rates and how sustained the recent surge in inflation is.

Investors on Monday continued to increase their expectations that high and persistent inflation would force the Fed to raise interest rates sooner and faster than policymakers have projected. Contracts in Federal Funds futures now imply three quarter-point rate increases next year, versus two as of late last week, according to data from the CME Group’s FedWatch.

Short-Term Outlook

Look for the selling pressure to intensify on the Aussie and Kiwi if the Fed meets market expectations.