Aussie stabilizes after nasty tumble

It has been a rough spell for the Australian dollar, which has steadied after a four-day slide. This downswing saw AUD/USD plunge over 300 points and break below the symbolic 70 level.

Market nerves weigh on the Australian dollar

Ahead of Wednesday’s FOMC rate meeting, risk sentiment is nowhere to be found. The US inflation report and expectations that the Fed will remain very aggressive have raised fears of a recession in the US. This has allowed the US dollar to surge, especially against risk-related currencies like the Australian dollar. Back in early April, AUD/USD was trading close to the 0.76 line, but the Aussie has been hammered, with drops of some 400 points in April and May.

With US inflation hitting a new 40-year high of 8.6%, some commentators are using the word “panic” to describe the financial markets. There are voices calling on the Fed to deliver a massive 0.75% hike at Wednesday’s meeting, though it would be a shock if the Fed did anything other than raise rates by 0.50%. Fed Chair Powell may use his press conference to hint at a 0.75% hike at a later date if inflation doesn’t start to fall soon, and such a message would likely boost the surging US dollar.

With no sign of an inflation peak, it’s clear that the Federal Reserve will have to keep its foot pressed to the floor when it comes to upcoming rate hikes. This makes it likely that the Fed will deliver 50-bp hikes in June, July and September. Just a couple of weeks ago the Fed signalled it would take a break in September, but that now seems a luxury it can’t afford, given that inflation continues to accelerate.

The Australian dollar didn’t get any relief from Australian releases, as NAB Business Confidence for May slowed for a second straight month, with a reading of 6 points, down from 10 previously. We’ll get a look at Westpac Consumer Confidence for June on Wednesday. The May reading came in at -5.6%, and another sharp loss could see the Aussie resume its downward movement.

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AUD/USD Technical

• There is weak support at 0.6902, followed by support at 0.6765
• There is resistance at 0.6973 and 0.7110

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