AUD/USD and NZD/USD Fundamental Daily Forecast – Fed Rate Hike Expectations Rise Ahead of RBA Rate Increase

James Hyerczyk
Updated: Feb 5, 2023, 06:26 GMT+00:00

The RBA is expected to deliver a fourth successive quarter-point interest rate hike on Tuesday as it grapples with an unexpected revival in inflation.


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The Australian and New Zealand Dollars plunged on Friday after a government report showed that U.S. employers added significantly more jobs in January than economists expected, potentially greenlighting the Federal Reserve to keep raising interest rates.

On Friday, the AUD/USD settled at .6922, down 0.0155 or -2.24% and the NZD/USD finished at .6326, down 0.0151 or -2.39%. The Invesco CurrencyShares Australian Dollar Trust ETF (FXA) closed at $68.47, down $1.62 or -2.32%.

Aussie, Kiwi Traders Shift Gears

The surprisingly strong payrolls number reversed a move from Wednesday when Aussie and Kiwi traders raised bets that the U.S. central bank would stop hiking borrowing costs after a widely expected 25-basis-point rate increase in March.

“After the Fed meeting it looked like markets had the advantage – it was still pricing in a rate cut, they took interest rates down, and they took the (US) dollar down, and now I think 48 hours later the Fed looks like they might have the upper hand again,” Marc Chandler, chief market strategist at Bannockburn Global Forex in New York said.

New Fed Expectations

Fed officials in December said they expected to raise the central bank’s benchmark overnight interest rate above 5%. Policymakers reiterated the message throughout January, even stressing they will need to hold it in restrictive territory for a period of time in order to sustainably bring down inflation.

Ahead of Friday’s U.S. Non-Farm Payrolls report, traders had bet the terminal rate will peak below 5% and that the Fed will cut rates in the second half of the year as the economy slows.

Traders are now pricing in the Fed’s policy rate to peak at 5.03% in June, up from 4.88% on Thursday afternoon.

Australian and New Zealand Dollar longs were forced to make adjustments to their forecasts calling for a pause by the Fed. This led to Friday’s massive liquidation by the previously bullish Aussie and Kiwi traders.

This Week’s Outlook – RBA to Lift Benchmark Rate 25 Basis Points

The major news this week that should influence the Australian and New Zealand Dollars is Tuesday’s Reserve Bank of Australia (RBA) monetary policy and interest rate decisions. Traders could also react to a speech by Fed Chair Jerome Powell, additional speeches by Fed officials and a preliminary report on consumer sentiment.

The RBA is expected to deliver a fourth successive quarter-point interest rate hike on Tuesday and is likely to follow up with a fifth in March as it grapples with an unexpected revival in inflation, a Reuters poll found.

Policymakers and analysts had expected price rises to cool toward the end of last year but were caught off guard. Inflation rose from 7.3% to a 33-year high of 7.8% last quarter, more than double its 2-3% target range.

All but one of 31 economists polled said the RBA would raise its official cash rate by 25 basis points to 3.35% at its meeting on Feb. 7. Only one respondent in the Jan. 27-Feb 2 survey expected no change.

For a look at all of today’s economic events, check out our economic calendar.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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