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AUD/USD rally faces setback: RBA rate hike and Powell's hawkish stance spark market dynamics


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Approximate 3% surge in the AUD/USD at the start of November hit a roadblock last week, as a dovish RBA rate hike and assertive remarks from Fed Chair fuelled shifts in market dynamics.

 

original-size.webpSource: Bloomberg

 

 Tony Sycamore | Market Analyst, Australia | Publication date: Monday 13 November 2023 07:58

A roughly 3% rally in the AUD/USD during the initial three sessions of November was erased last week, following a dovish RBA rate hike and hawkish comments from Federal Reserve Bank (Fed) Chair Jerome Powell.

While we do not intend to diminish the significance of the Fed Chair's hawkish tone last week, we interpret it as a strategic response to the pronounced easing in financial conditions since late October, encompassing the pricing in of 100bp rate cuts for 2024. This adjustment is not viewed as a reversal of the more cautious tones prevalent in the second half of October and during the November FOMC meeting.

Amid a packed schedule of Fed speakers and a resurgence of financial conditions after Friday's stock market surge, the likelihood of additional hawkish rhetoric this week is notable, especially if Wednesday's US October inflation report surpasses expectations.

Shifting the focus to key local events for the AUD/USD this week, the Q3 wages data on Wednesday is anticipated to be supportive. The minimum wage reviews from June, resulting in a 5.75% rise in award wages, are expected to drive a 1.3% QoQ increase in quarterly wages, pushing the annual rate to 3.9%.

The labour force report for October, set for release on Thursday, is expected to reveal a +24k increase in employment, with the unemployment rate predicted to rise to 3.7%. The participation rate is also anticipated to climb to 66.8%.

In its recent Monetary Policy statement, the RBA adjusted down its forecasts for the unemployment rate to 4.25% by the end of next year, down from the previous estimate of 4.5%, reflecting a persistently tight labour market despite a 425bp increase in interest rates.

AUD/USD technical analysis

In our update last week here, we noted the importance of resistance at .6520/30. Specifically, we said that: "Should the AUD/USD close above here post tomorrow's RBA meeting, it would confirm a medium-term low is in place in the AUD/USD at the recent .6270 low and open up a move towards the next layer of resistance at .6600/20."

After touching a high of .6523 on Monday last week, the local unit closed lower for five straight sessions to finish the week -2.42% at .6360. Its rejection from above .6500c leaves the AUD/USD still requiring a sustained break above resistance at .6520/30 to confirm a trend reversal. Until then, downside risks remain, including a possible test and break of the October .6270 low.

AUD/USD chart

 

Source: TradingView

  • Source Tradingview. The figures stated are as of 13 November 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.
 

 

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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