It appears that rising Fed rate expectations to the benefit of the USD have been lowering investors’ demand for risk assets. With several Fed members confirming this week that two more hikes this year seem reasonable and as markets still under-price such a scenario caution remains warranted. This is especially true as major central banks such as the ECB and BoJ are unlikely to consider additional policy action anytime soon, irrespective of still weak growth conditions.
All of the above suggests too that the USD should be bought on dips versus risk sensitive currencies such as the AUD. The AUD has been benefitting from better commodity price developments and normalizing RBA monetary policy expectations in the last few weeks. However, with the RBA unlikely to signal a less dovish policy stance anytime soon and as a stronger USD may weaken commodities, caution is warranted. We like selling AUD rallies.
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