AUD/USD and NZD/USD Fundamental Daily Forecast – Underpinned by Dovish Fed Expectations

The Australian and New Zealand Dollars are edging higher on Wednesday after a report released the previous session showing a slowdown in U.S. wages bolstered hopes that the Federal Reserve could hint at an end to interest rate hikes at its policy meeting later in the day.

Meanwhile, a report from New Zealand showed the country’s Q4 jobless rate edged up to 3.4%, just above historical lows.

At 07:00 GMT, the AUD/USD is trading .7068, up 0.0015 or +0.21% and the NZD/USD is at .6444, up 0.0004 or +0.06%. On Tuesday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $69.74, down $0.15 or -0.21%.

US Unit Labor Costs Slow

U.S. labor costs increased at their slowest pace in a year in the fourth quarter as wage growth slowed, Labor Department data showed.

The labor cost data is “indicating that maybe what the Fed has done is working and … we’re rounding the corner on interest rate hikes,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.

The price action suggests investors are hoping signs of falling inflation could point to a pause in interest rate hikes from the Fed at a time when stronger-than-expected Australian consumer inflation is pointing toward a 25 basis point rate hike at next week’s RBA policy meeting. Meanwhile, the RBNZ could raise rates 50bps or 75bps at its next meeting later in the month.

New Zealand Q4 Jobless Rate Edges Up to 3.4%, Just Above Historic Lows

New Zealand’s jobless rate held just above historic lows and wage inflation hit a three-decade high but there are signs the labor market is easing, adding to expectations the central bank will pull back on the size of its interest rate hike this month.

Data released by Statistics New Zealand on Wednesday highlighted the country’s tight labor market, with wage inflation, labor force participation and employment all at their highest in more than three decades.

After the report, overnight indexed swaps implied a peak for the cash rate of 5.19%, down from 5.28% on Tuesday. This prompted both ASB Bank and Bank of New Zealand now expect the central bank will move only by 50 bps rather than 75 bps in February.

Short-Term Outlook

The Federal Reserve is expected to announce a 25 basis point rate hike later today at 19:00 GMT. But it’s the comments by Fed Chair Jerome Powell after the announcement that are expected to move the market.

Bullish AUD/USD and NZD/USD traders are betting on a softer tone from the Fed. This could come in the form of an announcement of a rate hike pause, or even a pivot. Look for a sharp break if Powell comes across as hawkish.