The Australian Dollar Is Sizzling While the Economy Remains Chilled

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After DXY experienced a sudden decline, AUD rapidly gained ground while oil and gold held steady. 

Base metals are awaiting direction from China, but the significant miners (ASX: RIO) sharply dropped in value.

The EM stocks (NYSE: EEM) have rebounded with the return of China, as Junk Bonds (NYSE: HYG) decline and US yields rebound. Despite a poor earnings outlook, stock markets are optimistic.

Ahead of the Federal Open Market Committee’s meeting next week, the US Dollar is in a freefall. It made USD one of G10FX’s poorest-performing currencies just before the eventful gathering. Many FX traders expect this to indicate that the Fed’s tightening cycle is nearing its end, possibly resulting in a 25 bp pace for rate hikes and positivity from Chairman Jerome Powell about how monetary policies have had their desired effect on the slowing economy.

Despite expecting a policy shift during the Fed’s next meeting, we still anticipate a commitment to bring inflation under control. The US data for the upcoming week could prove that the labour market remains robust and continues contributing to wage inflation.

In light of this information, FX investors may profit from their overextended short-USD positions.

The European Central Bank is anticipated to raise interest rates by 50 bp next week. With the recent development of Eurozone activity data suggesting a recession could be averted, it has added credence to their hawkish policy stance. 

Even though inflation has been on an upward trend and there are still some downside risks for growth, ECB does not seem likely to surpass market expectations when making their decision, thus leaving FX investors without much incentive to buy EUR.

We anticipate that the Bank of England will implement a “dovish hike” as their Monetary Policy Committee remains at odds over how much tightness is needed.

Plus, when revealing their updated economic projections, they could present a less dour outlook than before; however, inflation should decrease shortly due to market rate expectations remaining high. The Pound Sterling may experience some setbacks accordingly.

IMF Chief Economist Pierre Olivier Gourinchas noted higher cases of surging inflation and severe slowdowns in the United States and China. “The world may soon be teetering on the edge of a global recession, only two years after the last one,” he said. 

As FX investors monitor the upcoming OPEC meeting, their attention will also be drawn to retail sales in Australia and PMIs, specifically out of Japan and China. If there is any indication that the Chinese economy has started its revival process, it could create further traction toward higher global commodity prices. It would bolster the strength of commodity currencies even if a less dovish-than-expected Fed takes place next week.

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