AUD/USD and NZD/USD Fundamental Daily Forecast – Weakness Ahead with Hawkish Fed Overshadowing RBA, RBNZ

The Australian and New Zealand Dollars are edging lower on Thursday after the Federal Reserve raised its benchmark interest rate on Wednesday and signaled more rate hikes to follow.

Although the Reserve Banks of Australia (RBA) and New Zealand (RBNZ) are poised to raise their benchmarks in October, they are not expected to keep pace with the Fed. This should help tighten the interest rate differential between Australian and New Zealand government debt and U.S. government debt, making the U.S. Dollar a more attractive investment.

At 07:00 GMT, the AUD/USD is trading .6601, down 0.0032 or -0.48% and the NZD/USD is at .5828, down 0.0025 or -0.43%. On Wednesday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $65.91, down $0.36 or -0.55%.

Fed Jumps Interest Rates by Another 75 Basis Points, Signals More Rate Hikes

The U.S. Federal Reserve announced its highly anticipated monetary policy decision on Wednesday, raising rates by another three-quarters of a percentage point.

The Fed decided to raise its target range for the Federal Funds rate by 75 basis points to 3 to 3.25 percent, citing its dual goals of maximum employment and inflation at a rate of 2 percent over the long-run.

With inflation remaining elevated, the Fed also said it anticipates that ongoing interest rate increases will be appropriate.

Economic projections provided along with the rate announcement suggest Fed officials expect to increase rates to 4.4 percent by the end of the year, well above the 3.4 percent forecast in June. Fed officials expect to raise rates to 4.6 percent by the end of 2023 before eventually scaling back rates in 2024 and 2025.

Meanwhile, Australia’s RBA Looking for Opportunities to Slow Rate Hikes

A top Australian central banker said on Wednesday monetary policy was not yet restrictive despite five rate rises in as many months, but the bank was looking for opportunities to slow the pace of hikes at some point, Reuters reported.

Deputy Governor Michele Bullock said the outlook for the global economy is ‘quite worrying” and it has implications for Australia. She further added that there are mounting problems in the United States, Europe, and China, and things are on “a bit of a knife edge.”

The RBA was still planning to keep lifting interest rates, she said, but a number of things could go wrong in the global economy that would undermine the RBA’s attempt to steer Australia safely through its rapid rate-hiking cycle.

General Forecast

Although we could see a few periodic counter-trend moves over the short-run due to oversold conditions, the bias for the AUD/USD and NZD/USD is likely to remain to the downside.

Federal Reserve Chairman Jerome Powell vowed on Wednesday that he and his fellow policymakers would “keep at” their battle to beat down inflation by raising rates at a faster pace and to a higher projected level than expected.

Powell was also blunt about the “pain” to come, citing rising joblessness and singling out the housing market, a persistent source of rising consumer inflation, as being likely in need of a “correction.”

Look for the AUD/USD and NZD/USD to remain under pressure over the mid- to long-term because the Fed is expected to be hawkish for a longer period of time than the RBA and the RBNZ. Furthermore, rates are expected to rise higher and faster in the U.S.