Aussie jumps on US dollar’s woes

The Australian dollar has surged on Tuesday. AUD/USD is trading at 0.6903 in the North American session, up 1.29%.

US dollar falls as risk appetite strengthens

The US dollar remains in a downward correction, as the safe-haven currency has lost its lustre, with risk sentiment gaining strength.

The Federal Reserve meets on July 27^th and the blackout ahead of the meeting won’t change the fact that this meeting is a live one, as the markets try to determine how aggressive a move the Fed has in store. A sharp rate hike is coming, but it remains unclear if the Fed will deliver an increase of 75 bp or a massive 100bp. Gone are the days when a 50bp increase was labelled as ‘supersize’ – with inflation continuing to rise unabated and a peak remaining elusive, the Fed is under pressure to ratchet up its ammunition in order to curb inflation.

Last week’s US retail sales report was stronger than expected, which briefly raised the likelihood of a 100bp move. However, comments from FOMC members Bostic and Bullard in favour of a 75bp move have led the market to price in a 75bp move as being the most likely. Still, the Fed has surprised before and a 100bp is a possibility.

The RBA is also in the midst of a rate-tightening cycle, but the cash rate is only at 1.35%, which won’t do much to dent an inflation rate that is galloping at a 5.1% clip. This means that we’re likely to see further hikes at upcoming meetings right through the second half of the year. The RBA released the minutes of its July meeting, with members noting that current rates were well below the neutral rate, which certainly wasn’t news. Still, the tone of the minutes was somewhat hawkish, helping the Aussie soar almost 100 points today.

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AUD/USD Technical

• AUD/USD is testing resistance at 0.6871. Above, there is resistance at 0.6949
• 0.6776 is providing support, followed by 0.6698

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