Australian Dollar Can’t Break Out, Fed Stays Cautious

 | Nov 22, 2023 08:07AM ET

  • RBA’s Bullock says inflation has peaked
  • Fed says it will proceed carefully

    • The Australian dollar continues to try and break out, without much success. In the North American session, AUD/USD is trading at 0.6561, up 0.09%.

    h2 RBA’s Bullock Says Inflation Has Peaked/h2

    Reserve Bank of Australia Governor Michele Bullock said on Tuesday that inflation has peaked and that the upside risk to inflation was domestic and demand-driven. Therefore, the RBA would need to respond by continuing to bring down inflation while preserving the gains made in the labor market. Bullock acknowledged that this involved treading on a “narrow path”.

    The RBA raised rates earlier in the month after four straight pauses. The rate hike was not a surprise but the market reaction was unexpected, with the Australian dollar sustaining sharp losses. Investors chose to focus on language in the policy statement which suggested that the bar to increase rates had been raised. The message that inflation remained too high was ignored, with investors treating the move as a dovish hike.

    h2 Fed Preaches Caution/h2

    At the November meeting, Fed Chair Powell sprinkled his post-meeting press conference with references to the Fed having to exercise caution and Tuesday’s FOMC minutes also mentioned the need to “proceed carefully”. The minutes gave no indication that members had discussed rate cuts, noting that members felt that the current policy was restrictive and pushing inflation lower. The markets have a more dovish view and have priced in a rate cut sometime in mid-2024. I expect the Fed to continue to sound hawkish and warn that rate hikes are still on the table, but it’s doubtful if anyone in the markets is listening.