- The market initially went higher during the trading session on Wednesday in the AUD/USD pair, as the narrative about the Federal Reserve continues to dominate the market.
- There has been a certain amount of “hopium” out there that the Federal Reserve would be a bit less hawkish, and therefore we started to see the US dollar selloff.
- This was since the Reserve Bank of Australia raised interest rates less than anticipated last month, and now have just raised interest rates 25 basis points.
- Furthermore, the Bank of Canada did the same thing, raising 50 basis points instead of 75. Because of this, people started to extrapolate the perhaps Americans would follow suit.
Enter the JOLTS report. It came out with 1 million more jobs available in the United States than anticipated, meaning that inflation is going nowhere. If there is a strong job market, it suggests that inflation will continue, whether it be through the commodities that can’t be transported, or simple wage inflation, the reality is that the Federal Reserve has a huge battle on its hands and will more likely than not remain extraordinarily aggressive.
Market Likely to Struggle
With a more aggressive Federal Reserve, it does make a certain amount of sense that we would see this market struggle, especially as the Australian dollars so highly levered to commodities and Asia as well. Ultimately, I do think that we break down from here and go to where the 0.62 level, which is a large, round, psychologically significant number, but more importantly than that, it’s an area where we had bounced from. With that being the case, I think you continue to fade rallies at the first signs of trouble, and therefore I think we do go much lower given a few sessions.
Furthermore, we have the jobs number coming out on Friday, and that is going to also have an influence on what people think the Fed will do going forward. Keep in mind that is not so much the fact that the Federal Reserve is going to raise interest rates by 75 basis points, but it’s the fact that the Federal Reserve is going to have a question and answers part of the press conference that will certainly catch a lot of attention in the Forex market.
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