AUD/USD and NZD/USD Fundamental Daily Forecast – Early Price Action Suggests Risk to Downside Ahead of Powell

The Australian and New Zealand Dollars are trading lower on Tuesday as prices continue to consolidate close to multi-month lows following last week’s steep sell-off. Helping to keep a lid on prices are a stronger U.S. Dollar and firm overnight Treasury yields. Looking at the bigger picture, last week’s surprise announcement by the Federal Reserve to move up the timeline of the next interest rate hike is generating the most resistance.

At 09:09 GMT, the AUD/USD is trading .7500, down 0.0044 or -0.58% and the NZD/USD is at .6974, down 0.0018 or -0.25%.

10-Year Treasury Yield Climbs to 1.50%

The 10-year U.S. Treasury yield rose to 1.50% on Tuesday morning, as investors awaited Federal Reserve Chairman Jerome Powell’s testimony to Congress on the central bank’s response to the coronavirus pandemic.

The yield on the benchmark 10-year Treasury note climbed less than a basis point to 1.501% at 08:55 GMT. The yield on the 30-year Treasury bond rose to 2.115%.

Dollar Catches Breath Ahead of Powell Testimony

The U.S. Dollar rose against the Australian and New Zealand Dollars as traders looked to testimony from Fed Chair Powell for further guidance on the central bank’s recent surprise shift in its policy outlook. The greenback has gained sharply since the Fed last week flagged sooner-than-expected interest rate hike, although it dipped on Monday to hand back a little bit of that rise.

Powell Set to Speak Before House Select Subcommittee on Coronavirus Crisis

In prepared comments, which were released Monday evening ahead of Fed Chair Powell’s testimony at 18:00 GMT, Powell said that while the “economy has sustained improvement,” it still faces continued threats from the COVID-19 pandemic.

“Widespread vaccinations have joined unprecedented monetary and fiscal policy actions in providing strong support to the recovery. Indicators of economic activity and employment have continued to strengthen, and real GDP this year appears to be on track to post its fastest rate of increase in decades,” Powell said. “Much of this rapid growth reflects the continued bounce back in activity from depressed levels.”

New Zealand Consumer Confidence Rises in Q2

Consumer confidence in New Zealand rose in the second quarter due to a strengthening in broader economic conditions that is expected to continue over the year ahead, a survey showed on Tuesday.

The Westpac-McDermott Miller consumer confidence index rose to 107.1 from 105.2 in the previous quarter. A reading above 100 indicates more optimists than pessimists.

The survey indicated that households feel more optimistic about the outlook of the economy over the coming year.

Daily Forecast

Last week, Powell raised inflation expectations and signaled an interest rate increase could happen sooner than expected. This surprise spiked Treasury yields and the U.S. Dollar sharply higher, triggering a steep plunge in the Aussie and Kiwi.

The AUD/USD and NZD/USD may not post the same dramatic sell-off as last week’s moves, but they could weaken on Tuesday if Powell once again mentions a sooner-than-expected rate hike is possible, if for example, the labor market strengthens considerably.

Prior to last Wednesday’s shift from dovish to hawkish, Fed policymakers were pretty resolute about maintaining their accommodative policy over the long-run. But since they showed some flexibility in their last policy statement, anything is possible on Tuesday. I don’t think Powell will say anything bullish for the Australian and New Zealand Dollars so the risk is still to the downside.