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The Australian dollar rallies as the Fed says it's willing to cut rates should the need arise

David Scutt

  • The Australian dollar rallied on Tuesday despite the RBA cutting rates for the first time in nearly three years and signalling there's likely to be another.

  • Senior US Federal Reserve officials, including Chair Jerome Powell, indicated a willingness to cut interest rates too should the need arise.

  • Rate cuts from the RBA have been expected for quite some time. However, speculation over near-term rate cuts from the Fed have only been a recent development. This partially explains why the Aussie dollar has rebounded modestly over the past week.

  • Australia's Q1 GDP report will be released on Wednesday. Annual growth is expected to be the weakest since the GFC.

  • Services PMIs from China, the US and UK are the headline data acts elsewhere on Wednesday.

The Reserve Bank of Australia (RBA) just cut official interest rates for the first time in nearly three years and signalled it's unlikely to be the last move in the current easing cycle.

However, despite the prospect of even lower interest rate, the Australian dollar continued to rally on Tuesday, briefly rising above the 70 cent level against the greenback for the first time in three weeks.

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It trades just below that level at 7am in Sydney on Wednesday.

AUD/USD 0.6991 , 0.0015 , 0.22%
AUD/JPY 75.59 , 0.21 , 0.28%
AUD/CNH 4.8376 , 0.0109 , 0.23%
AUD/EUR 0.6212 , 0.0007 , 0.11%
AUD/GBP 0.5504 , -0.0004 , -0.07%
AUD/NZD 1.0575 , 0.0005 , 0.05%
AUD/CAD 0.9362 , -0.0013 , -0.14%

Despite the release of major Australian economic data, the RBA's interest rate cut and a speech from RBA Governor Philip Lowe that signalled another cut in Australia's cash rate is likely this year, the bulk of the Aussie's move came in the second half of the session, sparked by growing expectations that the US Federal Reserve may cut interest rates too in the months ahead.

In a speech delivered on Tuesday, Fed Chairman Jerome Powell indicated a willingness to cut interest rates should the need arise.

“We do not know how or when these issues will be resolved,” Powell said in relation to trade tensions between the United States and China.

“We are closely monitoring the implications of these developments for the US economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labour market and inflation near our symmetric 2% objective."

Along the same lines at Powell's comments, his deputy at the Fed, Vice Chair Richard Clarida, said that while the US economy is currently in a "good place", the Fed would be prepared to take action if to prolong the economic expansion if required.

"We will put in policies that need to be in place to keep the economy, which is in a very good place right now, and it’s our job to keep it there,” Clarida told CNBC.

The acknowledgment from the two most senior Fed officials that rates could be cut soon helped to propel US stocks to the largest gain since January. Commodity markets also rebounded, reflecting the improvement in investor risk appetite.

As a result, the AUD/USD rose to as high as .7004 before getting knocked back below the figure towards the close.

Image: Investing.com

Whether the Aussie dollar will venture back above the .7000 level on Wednesday will likely be determined by the release of Australia's Q1 GDP report at 11.30am AEST.

Markets are looking for a quarterly increase of 0.4%, an improvement on the 0.2% expansion seen in the final there months of 2018. Despite the expected acceleration, growth over the year is tipped to slow to 1.8%, the weakest increase since the September quarter of 2009.

This 10-second guide has more on what to look out for in the GDP report.

Before that arrives, the Ai Group will also release Australia's Performance of Services Index for May at 8.30am AEST.

Services PMIs from China, the Eurozone, UK and US will also be released. Elsewhere, Eurozone retail sales and the May ADP National Employment Report in the US are the other headline acts.

The US Federal Reserve will also release its latest Beige Book on economic conditions.