The Australian and New Zealand Dollars are trading mixed early Wednesday as investors await the release of the latest policy moves by the U.S. Federal Reserve. The currencies are being supported by a weaker greenback as the U.S. struggles to contain a spike in coronavirus cases that threatens to derail a quick economic recovery. In other news, weaker than expected Australian consumer inflation helped cap prices that are currently hovering just under a 15-month high.
U.S. Federal Reserve Outlook
The harsh outlook for the world’s largest economy is expected to encourage Federal Reserve policymakers to stick to a dovish stance at its policy review, due to be released at 18:00 GMT. Australian Dollar bulls seem to be betting the Fed could hint at other ways to loosen policy down the road.
Investors will be watching the Fed announcements for any indications that the U.S. central bank will increase its purchases of longer-dated debt, implement yield caps or target higher inflation than it has previously indicated when it concludes its two-day meeting on Wednesday.
Australian Consumer Prices Fall in Second Quarter
Earlier in the session, the AUD/USD traded near its 15-month peak of .7182, but stepped back slightly after data showed Australia’s consumer prices fell by a record in the second quarter. The coronavirus pandemic is being blamed for causing one-off slides in the cost of child care and petrol, dealing a damaging setback to years of progress toward higher inflation.
The consumer price index (CPI) dived 1.9% in the second quarter, from the first, causing annual prices to drop 0.3% in the first negative reading since 1998. Forecasts called for a decline of 2.0% and 0.4% respectively.
Core measures of inflation that strip out the largest price moves were also subdued, with the trimmed mean dipping 0.1% for the first fall in its history. Annual core inflation slowed sharply to 1.2%, from 1.8% in the March quarter.
The news was a damaging blow to the Reserve Bank of Australia (RBA), which had only just managed to get inflation back up into its 2-3% target band after years of sub-par readings. Neither is the outlook favorable given the economy is almost certainly in its first recession since the early 1990s.
Short-term, the AUD/USD is bullish and could pop to more than 15-month highs later today if the Fed delivers a more-than-expected dovish stance.
Longer-term, the outlook is a bit gloomy with the RBA likely to be concerned that a run of low readings will drag down expectations of future inflation, lowering wage growth and making it harder to get prices up.
At its next meeting RBA policymakers are likely to address ways to prop up inflation after already cutting rates to a record low of 0.25% and taking the exceptional step of pledging to keep rates down for years to come in the hope of avoiding a drift toward damaging deflation.
Essentially, a dovish Fed should be supportive for the Aussie, but gains are likely to be capped as low inflation concerns move to the forefront.
For a look at all of today’s economic events, check out our economic calendar.
This article was originally posted on FX Empire
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