The Australian dollar was lower against the US dollar on Wednesday. Some initial optimism towards the Aussie after stronger than expected consumer inflation stats faded by the afternoon ahead of the FOMC meeting later in the day.
AUD/USD was lower by 16 pips (-0.24%) to 0.6744 with a daily price range of 0.674 to 0.678 as of 3pm GMT. Early gains quickly reversed, taking the currency pair back beneath 0.675 and close to 3-month lows.
The US dollar was seeing broad-based strength across currency markets on Wednesday ahead of the Federal Open Market Committee (FOMC) decision at 19:00 GMT. Almost every economist asked prior to the meeting expects that the central bank will choose to leave interest rates unchanged in a range of 1.50-1.75%.
The decision by itself is not a cause for dollar strength, since other central banks including the Reserve Bank of Australia are also opting to keep rates steady. As a reminder, a currency generally appreciates when the monetary policy of that country tightens relative to another country.
The contrast with other central banks is that the Fed indicated at its last meeting in December that it plans to keep interest rates on hold for most of 2020, unless something “material” changes. Other central banks have indicated interest rates could soon be header lower, or even government bond purchases increased if economic activity continues to slow. Markets will listen to Fed Chair Powell’s comments on a few key areas including Treasury bill purchases, historically low inflation and any likely economic impact from the coronavirus outbreak in China.
Australian inflation rising faster than expected in December helped the Australian dollar further rebound from recent losses on Wednesday, before the gains were eroded. The headline figure for consumer price inflation (CPI) was 1.8% year-over-year versus 1.7% y/y expected.
Higher inflation generally means rising economic activity and central banks aim to stop economies over-heating by raising interest rates when inflation is too high. However, inflation in Australia is still below the target of the RBA so a rate increase is not expected within markets.
