Australian dollar declined on Tuesday following the country’s central bank discouraged investor hopes for a hawkish pivot, kicking off a big week for a monetary policy covering the Federal Reserve and Bank of England decisions.
The Australian dollar fell as much as 0.47% before trading 0.23% weaker at $0.75025. Last week, it was as high as $0.75555. This level was not witnessed after July 6, as obstinate inflation stoked bets that the Reserve Bank of Australia could increase the critical rate as early as next year.
The central bank stressed that inflation was yet too low. However, it dropped its previous projection that rates were questionable to increase until 2024 and dropped a key target for the April 2024 government bond.
New Zealand’s kiwi dollar also weakened, falling 0.18% to $0.71705.
The same inflation dilemma hovers over other central banks.
The Fed starts a two-day conference later on Tuesday. It should announce the tapering of its asset purchases. The BOE convenes on Thursday with markets all but pricing in a small rate hike.
According to Standard Chartered’s head of G10 FX, Steve Englander, the elephant in the room is the headline, and underlying inflation, which is more distinguished than the (Fed) anticipated.
He added that they assume the (Federal Open Market Committee) to state that the Fed can act decisively if inflation is not moving towards target levels when tapering finishes. Nevertheless, it still anticipates inflation to fall as supply constraints ease. They think investors will see this as improving the likely timing of Fed rate hikes.
Dollar index ending flat
The dollar index, which measures the dollar against a basket of six major rivals, was almost even at 93.925, nursing a 0.25% decline from Monday when it withdrew from a two 1/2-week high of 94.313.
Sterling was on the back foot, sliding 0.07% to $1.3649.
The euro also trimmed 0.07% below to $1.15995.
The dollar softened 0.07% to 113.915 yen, extending to consolidate under an approximately four-year peak of 114.695 touched on Oct. 20.
Trader positioning points to bets on higher rates, with examiners crowding in to short the Japanese currency.
According to Societe Generale strategist Kit Juckes, that’s a bet that interest rate trends will proceed to move versus the yen as they grow elsewhere, especially in the U.S.
In other words, there’s a preponderance that thinks the bond selloff isn’t done yet. It’s also, to a shorter extent, a bet that risk sentiment will endure the experience.