Australian Dollar tests three-month highs above 0.7200 with all eyes on Fed’s Warsh
- AUD/USD appreciates for the fourth consecutive day to hit three-month highs at 0.7205.
- The US Dollar treads water on Friday with all eyes on Fed Chairman Kevin Warsh's speech.
- The Aussie remains bid as the RBA's bulletin fed hopes of further monetary tightening over the coming months.
The Australian Dollar (AUD) ticks higher for the fourth consecutive day against the US Dollar (USD) as investors brace for the Federal Reserve (Fed) Chairman Kevin Warsh’s speech at the Jackson Hole Symposium, due later on Friday. The AUD/USD pair hit session highs at 0.7205 earlier on the day, its highest level since mid-May, although it is trading at 0.7195 at the time of writing.
Investors' focus is on Jackson Hole, namely on Kevin Warsh’s speech, which is expected to provide further insight into the bank’s monetary policy, following the poor guidance of July’s meeting.
Analysts at MUFG/BTMU argue that Warsh's speech comes in a “high-uncertainty environment under a relatively new Chair.” They also note that, unlike previous cycles, “the latest options flow data does not show positioning building up definitively in one direction." In this context, MUFG/BTMU stress that “any explicit signal on the policy path, whether hawkish or dovish, would represent a genuine surprise and could trigger an outsized USD move seen in 2022 or 2024.”
Fed officials call for rate hikes ahead of Warsh's speech
Previously, some Fed officials called for immediate monetary tightening moves, adding that inflation remains stubbornly high. Kansas Fed President Jeffrey Schmidt said on CNBC on Thursday that inflation is “still sticky and we've got to continue to find ways to break through" while the Cleveland Fed President Beth Hammack reiterated that it is “time to act,” referring to interest rate hikes.
In Australia, the Aussie has received some support from the Reserve Bank of Australia's (RBA) Bulletin, released on Thursday. The Bank highlights that consumer prices remain "elevated" above the bank's 2%-3% target for most of the post-pandemic period, which feeds hopes that the central bank might hike interest rates for a fourth time before the end of the year.
RBA's Bulletin comes after Australia's Consumer Prices Index (CPI) numbers showed that headline inflation eased to a 3.5% year-on-year rate in July from 3.8% in June, above market expectations of a sharper deceleration, to 3.2%. The Trimmed Mean CPI remained growing at a steady 3.6% yearly rate, instead of easing to 3.5% as the market consensus had anticipated.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
