AUD/USD and NZD/USD Fundamental Daily Forecast – Aussie Developing Bullish Tone
The rallies in the Australian and New Zealand Dollars continued to pick up momentum on Thursday as bullish investors took advantage of thin trading conditions and oversold conditions to drive the Forex pairs not seen in a week. A change in sentiment may be setting up the Aussie for a prolonged rally.
At 1249 GMT, the AUD/USD is trading .7631, up 0.0012 or +0.16% and the NZD/USD is at .6890, up 0.0007 or +0.10%.
The catalyst behind the rally is the dialing down of expectations on the outlook for U.S. interest rate hikes next year based on the minutes from the Federal Reserve’s latest policy meeting.
Traders seem to have latched on to Fed remarks on inflation.
Some members disagreed with the idea that all the softness in inflation was due to issues that would pass. Other members, though, thought the Fed could be in danger of waiting too long for inflation to rise and could risk further instability in the financial markets.
Several FOMC members said the upcoming data would be critical in determining whether they felt the Fed was close to meeting its 2 percent inflation goal.
A “couple” members even suggested the Fed tweak its approach to inflation, moving away from the 2 percent goal and toward a more nebulous “gradually rising path” in prices instead.
The Australian and New Zealand Dollars are also being underpinned by comments from Fed Chair Janet Yellen before the release of the Fed minutes. The current surge by the AUD/USD and NZD/USD is being fueled by a renewed bout of U.S. Dollar selling, prompted by renewed uncertainty on the outlook for U.S. inflation from Yellen.
Yellen warned that tightening too quickly risked stranding inflation below the Fed’s 2% target. She also called out the continuing heightened level of uncertainty over the inflation outlook, even though she said that most FOMC members were using a working assumption that the downside mystery on inflation this year would not re-appear next year.
Forecast
The rally by the AUD/USD may actually last longer than previous expected. The remarks from the FOMC minutes such as ‘many officials observed that low inflation might reflect not only transitory factors, but also the influence of developments that could prove move persistent’ suggests that FOMC members might be on the verge of wavering on their dot point forecasts for 2018.
If the Fed members lower expectations for inflation then this may cast doubts as to whether the Fed will lift rates up to four times next year.
Additionally, the Australia-U.S. two-year bond spread has drifted higher in the past few days to 5 basis points, after briefly dipping below zero on Tuesday for the first time in 17 years.
Finally, I can build a case for a bullish AUD/USD if I combine the Fed comments with the improvement in the global economic outlook, and RBA Governor Lowe’s recent positive comments on the Australian economy.
Today’s price action suggests the buying may be greater than the selling at current price levels. This could be a strong indication that investor sentiment is beginning to shift to the upside.
This article was originally posted on FX Empire
