AUD/USD and NZD/USD Fundamental Daily Forecast – Hawkish Outlook for U.S. Rates Favoring U.S. Dollar

With the divergence in monetary policies between the Fed and the Australian and New Zealand central banks favoring the U.S. Dollar, traders are likely to continue to press the Aussie and Kiwi lower. Furthermore, any short-covering rallies are likely to be met by renewed selling pressure.
James Hyerczyk
USD/JPY
USD/JPY

Sellers continue to pound the Australian and New Zealand Dollars lower in the wake of U.S. Federal Reserve Chairman Jerome Powell’s hawkish testimony on Tuesday and ahead of another day of congressional testimony later today at 1400 GMT.

At 0726 GMT, the AUD/USD is trading .7353, down 0.0034 or -0.46% and the NZD/USD is at .6756, down 0.0028 or -0.42%.

On Tuesday, Powell told the U.S. Senate Banking Committee, “With appropriate monetary policy, the job market will remain strong and inflation will stay near 2% over the next several years.” He further added, “With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that – for now – the best way forward is to keep gradually raising the federal funds rate.

Powell was also offered the opportunity to comment on the escalating trade tensions between the United States and its major trading partners – China and the European Union. About tariffs, he said, that it “will be bad for our economy and for other economies”. However, he admitted that it was “difficult to predict” how the tensions will impact the U.S. economy.

In addition to Powell’s testimony, traders also continued to react to domestic events in Australia and New Zealand. The AUD/USD remained pressured by slightly dovish commentary from the Reserve Bank of Australia at its July monetary policy meeting and steep losses in Chinese financial markets. The NZD/USD initially rallied following news that New Zealand core consumer price inflation rose at the fastest annual rate since 2011 in the June quarter. However, the hawkish Powell took away all of those gains.

Forecast

In the absence of major economic data from Australia and New Zealand on Wednesday, the AUD/USD and NZD/USD are going to be controlled by a second day of testimony from Powell and fresh U.S. economic data. The Forex pairs are also likely to be pushed around by movement in Chinese financial markets and falling commodity prices.

Later today at 1230 GMT, this trend could continue with the release of reports on building permits and housing starts. June Building Permits are forecast to have risen by 1.33M units and June Housing Starts by 1.32M units. The Fed will also release its Beige Book at 1800 GMT. It is a report on East Coast manufacturing.

At 1400 GMT, Fed Chair Powell concludes his congressional testimony. He could be pushed harder on the impact of tariffs for a second day, especially by the Democrats on the Senate Banking Committee. Being a data-dependent Fed member, he’s not likely to get specific about the impact of the trade disputes until he sees some real numbers.

Increased demand for higher risk assets could slow down the selling pressure, but not enough to overcome the forces of higher interest rates and a stronger U.S. Dollar.

With the divergence in monetary policies between the Fed and the Australian and New Zealand central banks favoring the U.S. Dollar, traders are likely to continue to press the Aussie and Kiwi lower. Furthermore, any short-covering rallies are likely to be met by renewed selling pressure.

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