AUD/USD and NZD/USD Fundamental Daily Forecast – Traders Focusing on Fed’s Balance Sheet Reduction Plan

The Fed is widely expected to leave its benchmark interest rate unchanged, trim the number of rate hikes projected for the rest of the year, and release long-awaited details of a plan to end the monthly reduction of its massive balance sheet.
James Hyerczyk

The Australian and New Zealand Dollars are trading mixed on Wednesday as traders react to renewed concerns over U.S.-China trade relations, while waiting for the Fed to release its latest interest rate and monetary policy decisions. The market moving events, however, are likely to be the Federal Open Market Committee’s economic projections and the release of its plan to reduce its massive balance sheet.

At 13:34 GMT, the AUD/USD is trading .7098, up 0.0008 or +0.11% and the NZD/USD is at .6853, down 0.0001 or -0.02%.

US-China Trade Talk Concerns

Traders are reacting somewhat to renewed concerns over U.S-China trade relations. The reaction is being fueled by media reports of U.S. concerns that China is pushing back against American demands in trade talks.

On the optimistic side, U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin are headed back to China for another round of negotiations with Chinese Vice Premier Liu He, according to The Wall Street Journal, citing unnamed Trump administration officials.

Many Fed Decisions

The Fed is widely expected to leave its benchmark interest rate unchanged, trim the number of rate hikes projected for the rest of the year, and release long-awaited details of a plan to end the monthly reduction of its massive balance sheet.

According to the CME Group’s FedWatch tool, investors now put a 75 percent probability on the likelihood the Fed won’t raise its overnight benchmark interest rate, or federal funds rate, any more this year. The fed funds rate is currently set in a range of 2.25 percent to 2.50 percent.

Today’s economic projections will show how closely Fed policymakers align with the view of investors. In December, the Fed projected two rate hikes this year, but that outlook is widely expected to be cut to a single increase today. There is also the possibility that policymakers drop the number of expected cuts to zero.

The focus for Aussie and Kiwi traders is likely to be on the balance sheet, and the Fed’s plan to stop reducing its holdings of Treasury bonds and mortgage-backed securities each month by as much as $50 billion.

RBA Bullock Bearish on Housing

Early Wednesday, the RBA’s Bullock helped drive the AUD/USD lower when he sounded only cautiously optimistic on household’s ability to service their debt. However, the central banker also added that the Reserve Bank of Australia is encouraging banks not to tighten too much. This may have been a preemptive strike because if the banks tighten too much, the RBA may be forced to slash rates if the major lending banks continue to raise mortgage rates.

Looking Ahead….

Early Thursday, Aussie traders will get the opportunity to react to the Employment Change Report and the Unemployment Rate. The key report for Kiwi traders will be Quarterly GDP. It is expected to have risen 0.6%.

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