The AUD/USD pair has been on the rise in the Asian session, extending its recovery to near 0.6840. The Aussie asset has gained strength as investors have overlooked the volatility caused by the release of the hawkish Federal Open Market Committee (FOMC) minutes. This has been reflected in the S&P500 futures, which have seen a strong rebound after a choppy Wednesday, indicating a revival of the risk-appetite theme. The positive market sentiment has resulted in a significant correction in the US Dollar Index (DXY) to near 104.00, despite the Federal Reserve (Fed) policymakers’ eagerness to reach the peak of interest rates in order to bring down inflationary pressures.
The minutes of the FOMC meeting revealed that two policymakers, Cleveland Fed President Loretta Mester and St. Louis Fed President James Bullard, were not in favor of slowing the pace of interest rate hikes. Investors should remember that the Fed had reduced the pace of policy tightening in December’s monetary policy meeting to 50 basis points (bps) after increasing interest rates four times consecutively by 75 bps.
The lack of meaningful easing signals in the Australian inflation has strengthened the case for the Reserve Bank of Australia (RBA) to continue its policy tightening. On Wednesday, Australia’s Wage Price Index (Q4) was reported to have increased by 0.8%, lower than the consensus of 1.0% on a quarterly basis. This could be a relief to the RBA, as lower funds with households could lead to lower spending. Nevertheless, more rate hikes cannot be paused as the current inflation is four times higher than the desired target.
Overall, the AUD/USD pair has been on a steady recovery as investors have started to ignore the impact of the hawkish Fed minutes. The positive market sentiment has resulted in a significant correction in the US Dollar Index to near 104.00, while the absence of meaningful easing signals in the Australian inflation has further strengthened the case for the RBA to continue its policy tightening. Despite the upbeat market mood, investors should keep in mind that the Fed had reduced the pace of policy tightening in December’s monetary policy meeting to 50 basis points after increasing interest rates four times consecutively by 75 bps.