Aussie Extends Gains After Fed Rate Cut, Upbeat GDP

The Australian dollar rallied in early trading on Wednesday, after receiving a boost from the Federal Reserve decision to cut interest rates and Australia’s positive Q4 Gross Domestic Product (GDP) report. The rebound comes after falling last Friday to its lowest levels since March of 2009 against the US dollar.

The US dollar fell sharply against its major counterparts on Tuesday, after the Federal Reserve cut interest rates two weeks ahead of their March policy meeting. The cut of a half percentage point to a target range of 1.00% to 1.25% was announced after a meeting with finance ministers and central bankers of Group of Seven (G-7) countries.

The Fed statement was explicit in citing the economic danger of the coronavirus: “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate.”

Also on Tuesday, the Reserve Bank of Australia (RBA) cut interest rates to new record low of 0.5% to counter the impact of the coronavirus on the Australian economy. RBA governor Philip Lowe stated: “The global outbreak of the coronavirus is expected to delay progress in Australia towards full employment and the inflation target.”

On Wednesday, the Australian Bureau of Statistics reported that Australia’s economy grew by 0.5% in the December quarter and 2.2% over the past year. The figures beat analyst expectations of quarterly economic growth of 0.4% and annual growth of 2%, giving the Aussie a lift higher.

Looking at the AUD/USD chart we can see that price has entered a third day of gains, after sinking to the lowest levels in over a decade last week. During the outbreak of the coronavirus, the Australian dollar was particularly hard hit due to Australia’s close economic relations with China. Potential resistance in AUD/USD lies overhead at the 38% Fibonacci retracement level of 0.6661.

By Dan Blystone, Scandinavian Capital Markets