Australian dollar surges to 4-month high

• Australian dollar soars 1.29% on Thursday on Fed pause
• Markets price in Fed rate cuts despite Powell’s hawkish signals

The Australian dollar has moved lower on Friday, paring some of Thursday’s massive gains. The Aussie traded as high as 0.6899 earlier today, its highest level since February 21st.

Australian dollar soars after Fed pause

The US dollar sagged badly against most of the major currencies on Thursday, in the aftermath of the dramatic Federal Reserve meeting. The Australian dollar took full advantage of the Fed’s pause, soaring 1.29% as risk sentiment climbed.

There were two important aspects to the rate decision. First, as was widely expected, the Fed took a pause from raising rates after ten consecutive hikes. Second, the Fed signalled that the pause was by no means an end of the current rate-tightening campaign.

The Fed revised upwards its growth and inflation projections for the fourth quarter. As well, the dot plot indicated two more small rate hikes this year. That’s a pretty clear indication that we can expect further tightening in the second half of the year, although the markets remain more dovish despite Powell’s signals and have not ruled out rate cuts in the coming months.

Inflation in the US has fallen sharply to 4% and much of that is due to the Fed’s aggressive tightening. The next phase of the battle, whittling inflation down to the 2% target, may prove to be more difficult. The Fed hasn’t shied away from hiking rates and Fed Chair Powell hasn’t given any indication that he won’t keep raising rates, even though the current benchmark rate of 5%-5.25% is considered restrictive. There is still room for rates to go up and some Fed members have talked about rates climbing to 6%.

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AUD/USD Technical

• AUD /USD is testing support at 0.6863. Next, there is support at 0.6804
• 0.6953 and 0.7089 are the next resistance lines

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