AUD/USD and NZD/USD Fundamental Weekly Forecast – Lower if Traders Reduce Chances of 50bps Fed Rate Cut

James Hyerczyk
The markets have priced in a 25-basis point Federal Reserve rate cut on July 31. The source of volatility this week for Aussie and Kiwi traders will be whether there will be a 50-basis point rate cut. There are no Fed speakers scheduled this week so traders are going to have a hard time determining the chances of the more aggressive half-percentage point rate cut. Therefore, brace yourself for a potential choppy, two-sided trade.

The Australian Dollar was primarily underpinned last week by expectations of lower U.S. interest rates. Early in the week, the Aussie dipped a little after minutes from the Reserve Bank of Australia’s (RBA) monetary policy meeting in July showed the central bank was ready to adjust interest rates if required.

“The Board would continue to monitor developments in the labor market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time,” the minutes showed. “Lower interest rates would provide more Australians with jobs and assist with achieving more assured progress towards the inflation target.”

Last week, the AUD/USD settled at .7042, up .0021 or +0.30%.

On July 18, the Australian government reported that employment rose a surprisingly small 500 jobs in June, but all the weakness was in part-time work with full-time jobs rising 21,100. The unemployment rate held at 5.2 percent for a third month running, underlining the challenge the RBA has in reaching its new goal of 4.5 percent.

With the RBA already having cut rates in June and July the jobs data was not considered weak enough to add to the case for another easing in August.

New Zealand Dollar

In New Zealand, consumer prices rose at a faster pace in the second quarter, led by a surge in fuel prices. Consumer prices gained 1.7% from a year earlier, Statistics New Zealand said July 16. That was faster than the 1.5% pace in the first quarter and matched the median forecast of economists. Prices rose 0.6% from three months earlier, also matching expectations.

Last week, the NZD/USD settled at .6761, up 0.0066 or +0.98%.

United States

In the U.S. last week, the discussion centered around whether the Fed would settle on a 25-basis point rate cut or move toward the more aggressive 50-basis point rate cut.

On July 16, Federal Reserve Chairman Jerome Powell repeated his pledge to “act as appropriate” to keep the economic expansion going as his fellow central bank policymakers move toward an expected interest rate cut later this month. Traders interpreted this to mean the Fed would cut rates 25-basis points when it meets on July 30-31.

On July 18, New York Federal Reserve President John Williams argued for pre-emptive measures to avoid have to deal with too-low inflation and interest rates. The dollar plunged against the Australian and New Zealand Dollars as investors thought his comments bolstered expectations of an aggressive interest rate cut this month.

The dollar retraced some of its loss for the week on Friday after the New York Federal Reserve walked back Williams’ dovish comments. Furthermore, the Wall Street Journal reported that the Fed would cut rates by a quarter-percentage point and raise rates later if needed.

In economic news, the Empire State Manufacturing Index, Retail Sales and the Philly Fed Manufacturing Index, all came in better-than-expectations. Building Permits, however, came in lower than expected.

Weekly Forecast

There are no major reports out of Australia or New Zealand. In the U.S., the major reports are Core Durable Goods Orders on Thursday and Advance GDP on Friday.

Minor reports in Australia include Flash Manufacturing PMI and Flash Services PMI. RBA Governor Lowe is also scheduled to speak

The minor report to watch from New Zealand is Wednesday’s Trade Balance.

The markets have priced in a 25-basis point Federal Reserve rate cut on July 31. The source of volatility this week for Aussie and Kiwi traders will be whether there will be a 50-basis point rate cut. There are no Fed speakers scheduled this week so traders are going to have a hard time determining the chances of the more aggressive half-percentage point rate cut. Therefore, brace yourself for a potential choppy, two-sided trade.

This article was originally posted on FX Empire

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