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AUD/USD and NZD/USD Fundamental Weekly Forecast – Set Up for Rally as Fed’s Big Rate Hike Expectations Fade

The Australian and New Zealand Dollars finished lower last week after stronger-than-expected U.S. consumer inflation drove investors to bet on a super-sized 100 basis point rate hike by the U.S. Federal Reserve at its July 26-27 monetary policy meeting. The chance of a huge rate hike by the Fed encouraged speculators to bet heavily on the U.S. Dollar.

The U.S. economic data outweighed favorable news from Australia and New Zealand. In Australia, the Employment Change came in well above expectations and the Unemployment Rate dropped sharply. In New Zealand, the Reserve Bank (RBNZ) hiked its Official Cash Rate 50 basis points to 2.50%.

Last Week, the AUD/USD settled at .6792, down 0.0066 or -0.98% and the NZD/USD finished at .6156, down 0.0032 or -0.52%. The Invesco CurrencyShares Australian Dollar Trust ETF (FXA) closed at $67.23, down $0.61 -0.90%.

Aussie, Kiwi Fall on Faster Fed Rate Hike Expectations

The Australian and New Zealand Dollar plunged to 2 year lows and the U.S. Dollar soared as the Fed is expected to raise rates faster and further than peer central banks as inflation soars to four-decade highs.


Throughout the week, traders ramped up bets that the Fed will hike rates even faster after data on Wednesday showed U.S. annual consumer prices jumped 9.1% in June, the largest increase in more than four decades.

Odds of a 100 basis points move fell, however, after two of the most hawkish Fed officials on Thursday said they would prefer a 75 basis points hike.

Atlanta Fed President Raphael Bostic on Friday also cautioned against the central bank moving “too dramatically” because it could undermine the strong hiring and other positive trends still seen in the economy.

RBNZ Lifts Interest Rates 50bps, Sticks to Plan for More Rises

New Zealand’s central bank delivered its sixth straight interest rate rise on Wednesday and signaled it remained comfortable with its planned aggressive tightening path to restrain runaway inflation.

The RBNZ raised the official cash rate (OCR) by 50 basis points to 2.5%, a level not seen since March 2016. Continued rapid tightening to maintain price stability and support maximum sustainable employment was appropriate, it said.

Australia Unemployment Dives to 48-year Low as Jobs Boom

Australia’s unemployment rate dived to a 48-year low in June as hiring outstripped all expectations, while record vacancies suggested the labor market was set to tighten yet further and perhaps justify even larger increases in interest rates.

Figures from the Australian Bureau of Statistics on Thursday showed net employment had surged 88,400 in June from May, when it jumped 60,600. That blew away market forecasts of a 30,000 rise in June and brought gains for the year to a rousing 438,000.

The jobless rate slid to 3.5% from 3.9%, well below forecasts of 3.8% and the lowest since August 1974.

Weekly Forecast

The week’s key domestic news includes the New Zealand CPI early Monday, the RBA Monetary Policy Meeting Minutes on Tuesday and a speech from RBA Governor Philip Lowe.

However, the key market driver will be the markets expectations for the widely expected Fed rate hike on July 27.

Fed funds futures now indicate an 81% chance of a 75 basis points increase and a 19% chance of a 100 basis points increase. With the odds of a super-sized Fed rate hike falling, we could see a strong short-covering rally in both the Australian and New Zealand Dollars.

For a look at all of today’s economic events, check out our economic calendar.

This article was originally posted on FX Empire