- AUD/USD seen wandering a 0.7418 to 0.7730 range

- Helping to keep GBP/AUD supported around 1.8350

- As RBA and Fed stances leave the AUD directionless

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GBP/AUD reference rates at publication:Spot: 1.8457Bank transfer rates (indicative guide): 1.7810-1.7940Money transfer specialist rates (indicative): 1.8290-1.8328More information on securing specialist rates, hereSet up an exchange rate alert, hereAustralia’s Dollar is facing renewed confinement in and around recently-reduced levels over the coming weeks, according to analysts at Credit Suisse, given similar stances on the interest rate outlook at the Reserve Bank of Australia (RBA) and Federal Reserve (Fed).

The Australian Dollar was on course for a fourth consecutive day of gains over the U.S. Dollar on Thursday although its recovery from last week’s losses was slowing and with the AUD/USD exchange rate having pared back only around a third of its overall June decline from near the 0.78 handle.

AUD/USD was still well contained below the 0.76 level and near to 2021 lows in the penultimate session of the week while the Pound-to-Australian Dollar rate was probing back below the recently acquired 1.84 handle amid an underperformance by Sterling exchange rates that persisted in the wake of June's Bank of England (BoE) monetary policy decision.

Despite four back-to-back higher daily closes, AUD/USD had risen by only around 100 points for the week in what has been a cautious if-not lethargic recovery that is tipped by analysts at Credit Suisse as likely to see the currency pair running out of steam before it gets much above the 0.77 handle at best.

“There have been reasons to be long all year, but where the RBA has tethered monetary policy to the Fed so tightly that FX traders have typically found long AUDUSD a losing proposition. We will be curious to see whether that strategy will remain unchanged now the Fed is changing course, or whether the RBA hangs tight regardless,” says Alexia Jimenez, a macro strategist at Credit Suisse. “We turn neutral on AUD and NZD.”

Jimenez said in her latest review of Australian Dollar price action and prospects that AUD/USD is likely to spend the coming weeks wandering between 0.7418 and 0.7730 which, when combined with the bank’s outlook for the main Sterling exchange rate GBP/USD, suggests the Pound-to-Australian Dollar rate could be likely to remain well supported around Thursday's lows.

Above: AUD/USD rate shown at daily intervals alongside Pound-to-Australian Dollar rate.

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Setting the agenda for the Australian Dollar’s main exchange rate is the difference between RBA and Federal Reserve monetary policy, or apparent lack of difference which has gotten labour markets, unemployment rates and levels of wage growth rising up the agenda for currency analysts and markets where before many had been preoccupied with the perceived implications of double-digit percentage increases seen by many commodity prices this year.

“Last week’s FOMC outcome was clearly at the very hawkish end of market expectations, undermining the idea that the Fed is entirely careless or negligent. This matters for FX markets in as much as it invalidates the most standard structural bearish USD narrative, which is based on the premise that ultra-loose Fed policy effectively guarantees trend USD depreciation. At the same time, the arguments for a broad-based, persistent USD rally are not yet compelling,” Jiminez says

Underpinning AUD/USD not far beneath Thursday’s levels is the possibly-misinterpreted policy position of the Federal Reserve, which made waves last week when the bank’s dot-plot of individual projections for U.S. interest rates showed a majority of policymakers anticipating that borrowing costs could begin to rise in 2023 rather than in the following year as was indicated previously, sending investors scrambling to exit bets against the Dollar.

“It is a broad and inclusive goal. We’ll also under our new framework respond only to shortfalls in full employment. We will not raise interest rates preemptively because we think employment is too high or because we fear the possible onset of inflation. Instead we will wait for actual inflation, evidence of actual inflation or other imbalances,” says Jerome Powell, Chairman of the Federal Reserve, in testimony to a congressional committee earlier this week.

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{wbamp-hide end}{wbamp-show start}{wbamp-show end}Many in the market had suggested in the days after last week’s June Fed decision that current high levels of inflation could see the Fed lifting rates earlier than was anticipated, although Fed Chairman Jerome Powell said nothing to indulge that idea in testimony to a congressional committee earlier this week after agreeing with lawmakers that one-off and “transitory” factors are likely behind current levels of inflation and instead leaving the outlook for borrowing costs hinged entirely upon developments in the job market.

“We will not just look at the headline numbers for unemployment. We’ll look at all kinds of measures including unemployment and employment for various groups including ethnic groups and gender groups,” Powell told Congress when defining the “broad and inclusive goal” of maximum sustainable employment which rate setters must now meet before they will be able to say the Fed has delivered the targets necessary for them to then raise U.S. interest rates.

Powell told Congress this week that the Fed would not consider the job market to have been repaired unless and until high levels of employment are seen transcending demographic lines.

This is an outcome that has not typically been delivered by other policy cycles and a goal which could yet extend the duration over which the Fed keeps borrowing costs at record lows and continues to pump stimulus into the U.S. economy.

Above: Credit Suisse graph showing Australian inflation and wage growth metrics alongside market expectations for changes in RBA and Fed interest rates.

Ongoing scope for the Fed to delay a ‘normalisation’ of its monetary policy is a supporting factor for AUD/USD, but one that is countered somewhat by a similar position at the RBA and the weight that has attached around the ankles of the Australian Dollar.

However, analysts at Commonwealth Bank of Australia and some other Australian firms now say the RBA could actually evolve its position sooner than many have thus far anticipated.

“We now expect the RBA to be one of the first central banks to raise the cash rate. An earlier than expected rate hike is supportive of AUD. But in the near term, financial markets are more interested in the other two aspects of monetary policy, namely the yield curve control and bond buying programs,” says Joseph Capurso, a strategist at Commonwealth Bank of Australia.

“On bond buying, we still expect the RBA to announce a scale back of its asset purchases to $A50bn at its 6 July meeting. If we are right, AUD can recover some of its recent losses in our view,” Capurso says.

Capurso and the CBA team cited last week’s May employment report for increased confidence in their forecast that RBA policymakers are likely to vote to lift their cash rate from 0.10% before the end of next year, as the commercial lender anticipates that rapid declines in unemployment and pandemic-related labour shortages will lead to a return of long-elusive levels of wage growth that the RBA deems necessary for sustainably delivering its 2%-to-3% inflation target.

RBA Governor Philip Lowe said last Thursday that lacklustre consumer price pressures have roots in workers’ wage packets which have been “less responsive to economic conditions” than they need to be and that this is reason for the bank to keep the cash rate at its record low of 0.10% potentially until as far out as 2024: But with unemployment falling to pre-pandemic levels last month while Australia’s borders remain closed due to the pandemic, some local firms are now suggesting that the RBA’s preconditions for raising could be met sooner than investors anticipate and long before the Federal Reserve is seen as likely to meet its own goals.