The AUD/USD pair surged to the highest level in nearly two weeks after the Federal Reserve hiked rates by 25 bps, as expected. However, the central bank surprised markets with a more dovish tone than anticipated, leading analysts at Rabobank to lower their forecast for the target range of the fed funds rate. In this article, we’ll explore the implications of the Fed’s decision and Rabobank’s updated rate forecast for the AUD/USD pair.
The Fed’s Dovish Hike:
In the US session on Wednesday, the Federal Reserve announced its second rate hike of the year, taking the fed funds rate to a range of 2.00-2.25%. The hike was widely expected by the market, but the Fed’s statement and press conference were more dovish than anticipated. The central bank signaled that it may slow the pace of rate hikes going forward, citing risks to the economic outlook, including trade tensions and emerging market turmoil.
The AUD/USD pair rallied on the back of the Fed’s announcement, reaching a high of 0.7250, its highest level in almost two weeks. The Australian dollar is often seen as a proxy for China’s economy, which is heavily dependent on trade with the US. The more dovish tone from the Fed eased concerns about a further escalation in the US-China trade war, which had weighed on the AUD/USD pair in recent weeks.
Rabobank’s Updated Rate Forecast:
Despite the Fed’s more dovish tone, analysts at Rabobank do not expect the central bank to pivot away from its current path of gradual rate hikes. However, they have lowered their rate forecast for the target range of the fed funds rate to 5.00-5.25% from 5.25-5.50%. This implies that they now expect only one more hike of 25 bps instead of two, as they had previously forecast.
The main reason for Rabobank’s updated rate forecast is their expectation that the US economy will start to slow down in the coming months. They note that the fiscal stimulus from the Trump administration’s tax cuts is likely to fade, while the impact of the trade war is likely to become more pronounced. This could lead to a slowdown in business investment and consumer spending, which would weigh on economic growth and inflation.
The AUD/USD pair rallied to a two-week high after the Federal Reserve hiked rates but adopted a more dovish tone than anticipated.