- The Federal Reserve remains steady, with two governors favoring a 25 basis points cut.
- The statement indicates “increased uncertainty” and moderate growth in the first half of the year.
- The AUD/USD fluctuates between 0.6454 and 0.6471, with critical support near 0.6400.
The AUD/USD dipped on Wednesday, continuing a decline four days post the Federal Reserve’s decision, which was not unanimous, as two officials—Waller and Bowman—voted differently. Currently, the pair is moving within a volatile range at 0.6448, down by 0.76%.
In its recent policy statement, the Fed noted a slowdown in economic activity during the first half of the year, while unemployment remains low and inflation was characterized as “slightly rising.” Officials reinforced their commitment to achieving maximum employment and getting inflation back to the 2% goal but mentioned significant uncertainty surrounding the economic outlook.
The Fed also confirmed it would proceed with reducing its holdings of Treasury securities, agency obligations, and mortgage-backed securities. At this moment, the market is closely watching the ongoing press conference featuring Federal Reserve Chairman Jerome Powell.
AUD/USD’s reaction to the Fed’s decision
The AUD/USD traded with volatility, moving between the 0.6454 and 0.6471 range in response to the Fed’s announcement, briefly rising to 0.6536, approaching the 50-day SMA. Should Chair Powell adopt a dovish stance during the Q&A, we might see a test of higher prices.
On the other hand, a hawkish response could trigger tests around the 100-day SMA, which is at a minimum of 0.6424, followed by the 0.6400 level and the 200-day SMA positioned at 0.6394.
FAD FAQ
The U.S. monetary policy is directed by the Federal Reserve System, which strives for price stability and full employment. Primarily, they adjust interest rates to meet these objectives. When inflation exceeds the Fed’s 2% target, interest rates rise, making borrowing more expensive and strengthening the U.S. dollar. Conversely, if inflation dips below 2% or unemployment spikes, the Fed might lower rates to stimulate borrowing.
The Federal Reserve convenes eight times a year for policy meetings, where the Federal Open Market Committee (FOMC) evaluates economic conditions and decides on monetary policy. This committee comprises 12 officials: seven from the Governor’s Committee, the chairman of the Federal Reserve Bank of New York, and four of the remaining eleven Regional Reserve Bank presidents who serve a one-year term in rotation.
In severe situations, the Federal Reserve can implement a strategy known as Quantitative Easing (QE). This approach significantly boosts credit flow within the financial system, particularly during crises or periods of low inflation. QE was notably used in 2008, involving the Fed creating more dollars to purchase high-quality bonds from financial institutions. Typically, this weakens the U.S. dollar.
Quantitative Tightening (QT) is the opposite of QE, where the Federal Reserve stops purchasing bonds from financial institutions and refrains from reinvesting proceeds from maturing bonds. This generally has a positive impact on the value of the U.S. dollar.
