Today, the focus of investors is the Fed meeting. Its rates decision will be published at 18:00 (GMT). It is expected that the rate will be left at the same level of 0.25%. A little later (at 18:30 GMT), a press conference will begin at which Fed Chairman Jerome Powell will explain the decision, answer questions, and probably point out the prospects for the monetary policy of the US central bank.
In March, the Fed aggressively lowered interest rates (to 0.25% at the moment) and announced a program for the purchase of treasury bonds and mortgage-backed securities worth more than $ 2 trillion to stabilize financial markets.
This Fed meeting is taking place in the context of the economy’s attempt to recover from the blow inflicted by the coronavirus, the highest levels since the Great Depression of Unemployment, unclear business prospects in the country, and on the threshold of the presidential election. Judging by the last macro data, the United States may for the first time since the 1970s find itself in a stagflation situation characterized by increased inflation and sluggish economic growth. Why are some Fed leaders already starting to talk about the risks of accelerated inflation?
The DXY dollar index fell to levels of the end of 2019. Now it is traded slightly above 96.00, and its fall below 94 will confirm the beginning of a downtrend. A break of 94 mark will target the index on the mark of 89.
A weakening dollar raises the cost of imports, which is also accompanied by rising commodity prices. Meanwhile, US stock indices again moved to the bull market.
But the US bond yield curve also seems to have groped for the bottom, halted the decline and has been making a reversal attempt for the second month, aiming for growth. As you know, an increase in the yield of government bonds (and, therefore, a decrease in their price) is accompanied by an increase in the value of the national currency, in this case the dollar.
It is possible that at this meeting, Fed leaders will signal the first signs indicating the beginning of inflation, which may be considered by some economists and financial market participants as a signal for a possible revision of the current extra-soft Fed policy. With a high degree of probability, Jerome Powell will also recall the Friday report from the US labor market, which showed unexpectedly better than forecasted characteristics. Instead of the expected next decrease in the number of jobs outside the agricultural sector of the US economy, employers created an additional +2.509 million new jobs in May, and unemployment fell to 13.3% from 14.7% in April.
The labor market is the most important indicator of the state of the country's economy, as well as a key factor (in addition to data on GDP and inflation) for the Fed when deciding on rates. Any signals from Powell, aimed at the possibility of soon curtailing an aggressive stimulating monetary policy, can cause the fixation of short positions in the dollar and, accordingly, its growth. If Powell, on the contrary, speaks out in favor of further building up measures to stimulate the economy, then this will be followed by a further decline in the dollar and, probably, the growth of US stock indices.
The dollar is also likely to rise if Jerome Powell says economic prospects that are full of uncertainty do not justify the rise in stock prices. If Powell voices weak economic forecasts, recalls concerns about trade tensions between the U.S. and China, the effects of social distance on the economy and the risk of a new outbreak of coronavirus, the dollar will also receive support, especially against commodity currencies such as New Zealand, Canadian and Australian dollars.
In the meantime, these currencies maintain a fighting spirit against the dollar. The AUD / USD grew by 8.4% in April-May, and in June its growth continues. On Tuesday, the pair reached another 12-month high near 0.7042, maintaining a positive dynamics.
As the data released on Tuesday showed, the index of conditions for doing business in Australia increased by 10 points, to -24, and the NAB business confidence index in May was restored for the second month in a row, showing an increase of 25 points, to -20. The improvement came amid softening of quarantine restrictions and the resumption of companies throughout the country. The employment situation also improved slightly, although recent data still indicate a continuing decrease in the number of jobs, the NAB said.
Meanwhile, despite the relaxation of quarantine measures, some restrictions still apply, having a negative impact on the economy, primarily on the service sector. In the 1st quarter, the Australian economy contracted, and Treasury Secretary Josh Freidenberg officially announced the recession that was taking place in the country for the first time in 30 years.
The bullish 3-month trend of the AUD / USD is accompanied primarily by the weakening of the US dollar. If it stops or at least slows down the fall, the trajectory of the AUD / USD may also change. Thus, today's statements by the Fed management will be important for the entire financial market, including for traders trading this currency pair.
Last Tuesday, the AUD / USD pair reached its next 12-month high near 0.7042, near which the important long-term resistance level (EMA144 on the weekly chart) passes.
The pair is also trading above the important support level 0.6825 (the Fibonacci level 50% of the correction to the pair’s decline from 0.8130 in January 2018 to the 2020 lows near the level 0.5510), which indicates the full recovery of the positive dynamics in this decline, and significantly above the key support level 0.6640 (EMA200 on the daily chart), which separates the bull market from the bear market.
Thus, the current technical picture speaks in favor of long positions on AUD / USD. A break into the zone above the resistance level 0.7210 (EMA200 on the weekly chart) will send the pair to a resistance level 0.7750 (EMA200 and EMA144 on the monthly chart), and its breakthrough will talk about the final return to the multi-year bullish trend of the AUD / USD.
An alternative scenario will be related to the return into the zone below the support level 0.6640 and the resumption of decline. The first signal for the implementation of this scenario may be a breakdown of the short-term support level of 0.6890 (EMA200 on a 1-hour chart).
Support Levels: 0.6890, 0.6825, 0.6640, 0.6510
Resistance Levels: 0.7045, 0.7130, 0.7210, 0.7450
Trading Recommendations
Sell Stop 0.6965. Stop-Loss 0.7030. Take-Profit 0.6890, 0.6825, 0.6640, 0.6510
Buy Stop 0.7030. Stop-Loss 0.6965. Take-Profit 0.7045, 0.7130, 0.7210, 0.7450
