AUD/USD Price Forecast: Trades with caution ahead of Fed’s policy outcome
- The Australian Dollar is slightly down to near 0.7125 against the US Dollar ahead of the Fed’s policy.
- The Fed is highly anticipated to hike interest rates by 25 bps to 3.75%-4.00%.
- Market experts see the dot plot’s outcome as key trigger for US Dollar’s next move.
The Australian Dollar (AUD) trades slightly lower at around 0.7125 against the US Dollar (USD) during the European trading session on Wednesday. The Aussie pair is under pressure as the market sentiment is cautious, with investors awaiting the Federal Reserve’s (Fed) monetary policy announcement at 18:00 GMT.
At press time, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, holds onto its almost two-week high at around 99.70.
According to Commerzbank, the latest upside surprise in inflation means that “a majority on the FOMC is likely to vote to increase the federal funds rate,” a move that would “help allay doubts about the Fed’s credibility.”
However, the bank clarified that the market reaction will hinge not just on the decision itself but also on the updated projections. The bank added, “If the dot plot suggest that further hikes are quite likely, the market is likely to see this as confirmation that the benchmark interest rate could rise further, which could cause the US Dollar to gain ground.”
AUD/USD Technical Analysis
AUD/USD trades subduedly at around 0.7125, keeping a mildly bearish tone as it sits below the 20-period exponential moving average (EMA) at 0.7152. The short-term trend bias remains capped while price holds under this dynamic barrier, and the Relative Strength Index (RSI) near 48 drifts just below the midline, hinting at fading bullish momentum rather than oversold conditions.
On the topside, immediate resistance is aligned with the 20-period EMA at 0.7152, and a daily close above this level would be needed to ease the current downside pressure and open the way for a corrective advance. Looking down, the pair could be exposed to 0.7050 if it fails to hold the immediate support level near the September 14 low at 0.7108.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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.