Sometimes patience is dangerous, sometimes helpful. The Fed has been remaining passive for too long in 2021. However, the situation is changing. Yesterday’s mistakes may turn out to be the right decision today. Perhaps the RBA, which is in no hurry, chose the right decision? Let’s discuss the topic and make up an AUDUSD trading plan.
Weekly Australian dollar fundamental analysis
The safest bet in Forex, as in all financial markets, is the most dangerous. This is true not only for investors, but also for central banks. In 2021, the Fed seriously miscalculated, believing that high inflation is transient and disinflationary forces like globalization and technology will cause consumer prices to slow. Realizing its own mistake, the Fed was forced to act aggressively. As a result, the safest bet was on actively growing inflation. What if the market is wrong?
The level of aggression of FOMC officials regarding the future federal funds rate is currently off the charts. Former doves Mary Daly, Charles Evans and Raphael Bostic are talking about the possibility of raising borrowing costs by 50 basis points in March. It is obvious that James Bullard, Christopher Waller and Loretta Mester prefer the Fed to bring the borrowing costs to a neutral level of 2.5% as quickly as possible. As a result, the derivatives market believes in seven acts of monetary restriction in 2022 and that the Fed will make a “big step” in May. Such forecasts are based on the belief in further acceleration of consumer prices in the US, which have already reached 40-year highs.
The problem is that cost pressures in many companies, except for the energy sector, are peaking. At the same time, consumer sentiment is starting to fall. These factors can provoke a slowdown in inflation. The forecast for the Fed rate will seem too aggressive to investors, they will begin to abandon it, which will lead to a USD weakening. Among the winners will be currencies whose issuing central banks have decided to patiently wait out high inflation. The best example is the Australian dollar.
The AUDUSD pair is growing steadily, even though the Fed seems to investors to be much more aggressive than the RBA. This is only true for 2022. In 2023, the regulators may switch places. The RBA can quickly raise the cash rate by 100 basis points at several consecutive meetings. The Fed is likely to slow down.
Dynamics of forecast rate spread
Markets grow on expectations. It is likely that not only a strong commodity market, falling unemployment and an overheated Australian economy are among the drivers of the AUDUSD rally, but also expectations that a lot will change in the monetary policy of central banks in 2023. This allows me to predict the continuation of the AUDUSD uptrend.
Weekly AUDUSD trading plan
In my opinion, after reaching level 0.76 profit-taking may follow. It will be profitable to enter long trades during the correction and when the price rebounds from the supports at 0.746 and 0.744. The idea of entering AUDUSD purchases during falling prices caused by weak China’s PMI data looks quite interesting. Such data will increase the risks of additional PBoC stimulus, which is bullish for the Aussie.
Price chart of AUDUSD in real time mode
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