AUD/USD gains ground, all eyes on Federal Reserve

The Australian dollar is in positive territory on Wednesday, ahead of the Federal Reserve’s rate announcement. In the European session, AUD/USD is trading at 0.6681, up 0.16%.

Fed expected to deliver 25 bp hike

The Federal Reserve winds up its policy meeting later today and anything other than a 25 basis point hike would be a massive surprise. The Fed is meeting against the backdrop of a banking crisis in which four US banks as well as Credit Suisse have failed, stunning the financial markets. Investors will be listening carefully to Fed Chair Powell who is expected to address the banking crisis. Today’s hike is a foregone conclusion, but a key element of this meeting will be the Fed’s updated rate projections for the first time since December. Will the projections call for more hikes or will the Fed signal that cuts are coming later this year? The rate path that the Fed outlines could have a significant impact on the movement of the US dollar, especially with investors jittery after the recent market mayhem.

The US has responded quickly to the banking crisis, which has eased the fears which gripped the markets last week. The Fed and other central banks coordinated action to boost liquidity and 11 major lenders have pledged $30 billion to rescue First Republic Bank. This may not be enough though and First Republic could require federal assistance in order to stay afloat.

Treasury Secretary Yellen sought to calm nervous markets on Tuesday, saying that the banking system was stabilizing and that the government would intervene to protect depositors of small banks if needed. This is a clear message that Yellen is prepared to do what she can to prevent the contagion from spreading further.

In Australia, the Reserve Bank of Australia was quick to reassure the markets and the public about the strength of the Australian banking system. RBA Assistant Governor Kent said on Monday that Australian banks are “unquestionably strong” in the midst of the “strained” conditions in the global financial markets. The RBA minutes on Tuesday were on the dovish side, stating that the central bank only considered a 25-bp hike at the March meeting. This Australian dollar responded with sharp losses of 0.72% in response.

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AUD/USD Technical

• AUD/USD is testing resistance at 0.6672. Above, there is resistance at 0.6753
• 0.6618 and 0.6537 are providing support

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