AUD/USD and NZD/USD Fundamental Daily Forecast – Hawkish Fed Minutes Capping Gains Ahead of Friday’s NFP Data

The Australian and New Zealand Dollars are inching lower on Thursday after minutes from the Federal Reserve’s December meeting offered no surprises or new information about the size of its expected rate hike in February.

Meanwhile, the Aussie is coming off of a strong performance on Wednesday. The currency jumped 1.6% to .6886 after China’s state planner allowed three central government-backed utilities and its top steelmaker to resume coal imports from Australia, the first such move since Beijing imposed an unofficial ban on coal trade with Canberra in 2020.

At 02:29 GMT, the AUD/USD is trading .6817, down 0.0022 or -0.31% and the NZD/USD is at .6277, down 0.0016 or -0.26%. On Wednesday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $67.96, up $1.40 or +2.11%.

Fed Minutes:  No Rate Cuts in 2023, Inflation Risk Remains in Focus

Minutes from the Federal Reserve’s December policy meeting released Wednesday showed while Fed officials welcomed easing October inflation data, they stressed it would take substantially more evidence of progress to be confident inflation was coming down in a sustained manner.

Additionally, no Federal Reserve officials thought it’s be appropriate to begin cutting rates in 2023, and officials worried easing financial conditions could complicate the central bank’s efforts to bring down inflation, according to internal discussions at the Fed’s policy meeting three weeks ago.

Policymakers also noted the Fed would need to maintain a “restrictive policy stance” until data gave central bankers confidence inflation pressures were easing.

Finally, Fed officials suggested price pressures could prove to be more persistent than anticipated, noting the job market has remained strong for longer than anticipated. Several participants said the Fed’s median projection for rates to peak at 5.1%, above market expectations, underscored the Fed’s commitment to bring down inflation.

RBA Considered Pausing Hikes at December Meeting, Still Sees More Ahead

In contrast to the Federal Reserve, the Reserve Bank of Australia (RBA) considered leaving interest rates unchanged at its December policy meeting. It cited the lagged effects of the aggressive tightening delivered so far and the benefits of moving cautiously in an uncertain environment.

Additionally, the RBA weighed three options at its last decision of 2022 – hiking by 50 basis points, 25 basis points or pausing, but the arguments for a 25 basis-point hike prevailed.

The RBA’s next policy meeting is not until early February. Markets are split on whether the RBA will go ahead with another 25 basis point or even pause. They expect interest rates to peak about 3.7% by August next year.

“The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set path,” said the bank, reiterating its commitment to bring inflation to its 2-3% target.

RBNZ Ramps Up Rates Again

The Reserve Bank of New Zealand upped its pace of tightening in November delivering a record 75 basis points rate hike after five consecutive 50 basis point rate increases.

Minutes from the meeting showed the RBNZ also considered a larger 100 basis point hike but opted for a smaller increase. The central bank raised its forecast for its peak interest rate to 5.5%, up from a previous forecast of 4.1%.

Short-Term Outlook

The Fed minutes were hawkish. This could put a lid on the AUD/USD and the NZD/USD ahead of Friday’s U.S. Non-Farm Payrolls report.

Ahead of the Fed’s Jan. 31 – Feb. 1 policy meeting, trading are expecting the U.S. Dollar to remain data dependent. Friday’s it’s a jobs report, on Thursday Jan. 12 it will be the U.S. consumer price index report.