- AUD/USD posts gains of over 130 pips and is targeting the 100 DMA at 0.7260.
- The Fed raised the federal funds rate (FFR) by 50 bps and would start its first quarter on June 1.
- Fed Chairman Powell stressed that 75bp hikes are not something the Fed is considering.
The AUD/USD is recovering strongly and jumped from 0.7090 to 0.7230 after the Federal Reserve decided to raise rates by 50 bps and announced the start of QT on June 1, as the central bank The US government is aiming to trim its $8.9 trillion balance sheet. Around 0.7225, AUD/USD reflects investor sentiment as Fed Chairman Jerome Powell speaks.
So far, the Fed’s policy decision appears to be perceived as aggressive, as Fed money market futures are pricing in a 77% chance of a 50bp hike at the June meeting and a 23% chance of a probability of an increase of 75 bp.
In his press conference, Fed Chairman Powell said that 75bp hikes are not something the Fed is considering, and are not actively considering. He added that “if we see what we expect to see,” 50bp hikes would be “on the table” at the next two FOMC meetings.
Comments on the Fed decision
The Federal Open Market Committee (FOMC) revealed in its monetary policy statement that “inflation is expected to return to its 2% target” and expressed that the high prices reflect supply and demand imbalances related to with Covid-19. The central bank reiterated that it would remain “attentive to inflation risks.”
Additionally, the US central bank acknowledged the negative impression on first-quarter GDP, saying “household spending and business fixed investment remained strong.”
As for the balance sheet reduction, the Fed will start on June 1 at a slower pace than estimated. The central bank would reduce its balance sheet by $47.5 billion in the first three months. The initial limit for US Treasury bonds would be 30 billion, while mortgage-backed securities (MBS) would be 17.5 billion. After three months, the quantitative adjustment (QT) will reach $60 billion in US Treasuries and $30 billion in MBS.
AUD/USD Market Reaction
AUD/USD immediately jumped above the R1 daily pivot at 0.7150, recovering sharply towards the R3 pivot point around 0.7250, and is paring last week’s losses. At time of writing, AUD/USD is below daily highs around 0.7225.
Technical levels
Source: Fx Street
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