Aussie under pressure from Fed, China

The Australian dollar has extended its losses today, as AUD/USD trades just above the 0.74 line in the European session.

It has been a rough stretch for the currency, which has managed just one winning session since April 5th. The Australian dollar has been hurt by the Fed-powered US dollar as well as concerns about China’s growth, as the country grapples with an outbreak of Covid.

The Federal Reserve has embarked on a rate-tightening cycle, which began with a 0.25% hike at the March meeting. With US inflation soaring, the Fed has been criticized for falling behind the curve on inflation. There is growing pressure to take stronger action and Fed members, including doves such as Lael Brainard, have been telegraphing that one or more oversize rate hikes of 0.50% are on the table. The Fed traditionally adjusts rates by 0.25%, and there are concerns that if the Fed is overaggressive in its rate hikes, it will be difficult to ensure a soft landing for the economy, which could fall into a recession.

The Fed is also tightening policy via quantitative tightening, as it will begin to trim its balance sheet shortly. US Treasury yields have climbed sharply as a result of the Fed’s new hawkishness, with 10-year yields currently at 2.83%, a 52-week high.

China’s growth in jeopardy due to Covid

Investors remain concerned over the Covid-19 outbreaks in Shanghai and elsewhere. China has imposed a strict zero-Covid policy and has imposed harsh lockdowns. There are estimates that a staggering 375 million people are under full or partial lockdown, which is a huge slice of the country’s GDP. Things could get worse if the government extends lockdowns to other manufacturing hubs, which would lead to massive disruptions in supply chains. China’s Covid woes could weigh heavily on the Australian dollar, as the Asian giant is Australia’s largest trade partner. The Aussie is struggling, and fell as low as 0.7391 earlier this week, its lowest level since March 22nd.

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AUD/USD Technical

  • AUD/USD faces resistance at 0.7605 and 0.7750
  • There is support at 0.7371 and 0.7282

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Kenny Fisher

Kenny Fisher

Market Analyst at OANDA
A highly experienced financial market analyst with a focus on fundamental analysis, Kenneth Fisher’s daily commentary covers a broad range of markets including forex, equities and commodities. His work has been published in several major online financial publications including Investing.com, Seeking Alpha and FXStreet. Based in Israel, Kenny has been a MarketPulse contributor since 2012.