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James Hyerczyk

The Australian and New Zealand Dollars are trading higher on Wednesday after reversing earlier weakness. The price action suggests investors are betting on the U.S. Federal Reserve to continue to be accommodative in its monetary policy statement to be released later in the session at 18:00 GMT.

With their respective economies in pretty good shape as economic activity resumes in both countries following the lifting of coronavirus restrictions, the main focus will be on Fed policy, Fed Chairman Jerome Powell’s press conference and policymaker economic forecasts.

While no major changes are expected, recent rises in Treasury yields may have raised concerns enough with Fed officials to warrant them to take steps to flatten the yield curve. Making moves to pressure yields would weaken the dollar and send the Aussie and Kiwi even higher.

At 12:27 GMT, the AUD/USD is trading .7017, up 0.0053 or +0.77% and the NZD/USD is at .6546, up 0.0032 or +0.49%.

Some analysts are playing down the chance the Fed will adopt yield curve control to guide 10-year Treasury yields lower, but uncertainty about the outcome of the Fed meeting could keep the U.S. Dollar under pressure.

“The Fed can afford to wait and see on yield curve control because the U.S. economy has gotten past the crisis phase and only just entered the healing phase,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.

Australian Westpac Consumer Sentiment Rebounds

Bloomberg reported earlier today that Australia’s consumer confidence surged back toward levels recorded before the COVID-19 outbreak hit the economy, boosted by the authorities’ success in bringing the coronavirus under control.

The sentiment index advanced 6.3% to 93.7 in June, having recovered all of the extreme 20% drop recorded during the March-April pandemic peak, Westpac Banking Corp. said in a statement Wednesday. The “economy, next 12 months” sub-index gained another 8.4% and the “economy, next 5 years sub-index was up 6.4%.”

“The index is now only 2% below the average in the preceding September to February period,” said Bill Evans, chief economist at Westpac. Still, he noted, “with the unemployment rate set to remain elevated; extensive restrictions staying in place and the economy facing permanent structural change it would be surprising if the recent upward momentum continues.”


Daily Forecast

Traders are expecting the Fed to deliver key guidance. They want to know if the Fed sees a V-shaped recovery in the economy like the stock market is indicating or something less-bullish. Investors also want to know if the Fed guidance will be targeting specific outcomes on inflation or unemployment … before they take their foot off the stimulus pedal.

Look for the Fed to remain accommodative, which should continue to underpin the AUD/USD and NZD/USD. If policymakers decide to flatten the yield curve then this should trigger a fresh wave of new buying.

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