AUD/USD and NZD/USD Fundamental Daily Forecast – Fed Rate Hike Expectations Move to Forefront

The Australian and New Zealand Dollars are testing their lowest levels since early January on Friday after aggressive sellers took out key support. A stronger U.S. Dollar is also weighing on the Aussie and Kiwi. The catalyst behind the moves are rising Fed rate hike expectations. This is being driven by hotter-than-expected U.S. consumer and producer inflation.

At 09:09 GMT, the AUD/USD is trading .6827, down 0.0052 or -0.76% and the NZD/USD is at .6208, down 0.0050 or -0.79%. On Thursday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $68.27, down $0.07 or -0.10%.

Other catalysts driving the price action are this week’s Australian employment data miss, economic damage from natural disasters in New Zealand and reports from the United States showing hot inflation, retail sales and labor market.

RBA Governor Lowe Sees More Rate Hikes

Reserve Bank of Australia (RBA) Governor Lowe reiterated on Wednesday that interest rates had not peaked, adding that he was unsure how high they had to go as the central bank, seeking to control inflation, tried to follow a narrow path to a soft landing.

Getting there, and avoiding a recession, depended on moderation in wage rises, Lowe told members of parliament.

“Inflation at the moment, 7.8%, is way too high. It needs to come down. That’s our primary consideration,” Lowe said.

When asked about how far interest rates would have to rise, he said policymakers had an open mind.

“I don’t think we’re at the peak yet but how far we have to go up I don’t know,” he said, adding that the central bank would keep monitoring inflation, consumer spending, the global economy and wages growth.

RBNZ to Raise Rates 50 Basis Points

The Reserve Bank of New Zealand (RBNZ) holds its first meeting of the year next week and is widely expected to raise rates by 50 basis points to 4.75%.

Analysts are less sure whether it will stick to a projection that rates will peak as high as 5.5%, in part given the economic impact of massive flooding across the country.

Short-Term Outlook

Despite higher rate hike expectations from the RBA and the RBNZ, the narrative has shifted back to the Federal Reserve and its highly likely 25-basis point rate hikes in March, May and June. They are enough to keep the demand for the U.S. Dollar afloat.

Furthermore, investors are having doubts about Federal Reserve Chairman Jerome Powell’s assessment that inflation is slowly moving lower.