AUD/USD was under pressure in early day trading following news of a downgrade from rating agency Moody’s. The pair bounced higher in early European trading but fell under pressure during the North American overlap on the back of a stronger dollar. Despite the heavier tone today, the pair remains within a broader range that has been playing out over the past four sessions.
Moody’s downgraded Australian banks on heightened concerns over the Australian housing market. The top four major banks saw their ratings fall from Aa3 to Aa2. Moody’s performed a similar action in early May when it downgraded the major Canadian banks, citing concerns over the housing market and increasing household debt.
AUD/USD found support at 0.7589 following the European open and turned higher to erase more than half of the early day drop. Gains were capped into the North American session as Fed member Dudley’s comments triggered a stronger dollar.
There were some market expectations that the Fed would signal a pause in its current tightening schedule at their meeting last week as inflation is running well below 2% targets, despite the unemployment rate falling to 16-year lows. Dudley reaffirmed that the current subdued level of inflation is as a result of transitory factors and that inflation was expected to pick up over time.
He also reiterated that not raising rates now would force the Fed to normalize at a rapid pace down the road, on the assumption of a sudden tightening of correlation between the labor markets and inflation, which could lead to a recession.
His comments triggered a sharp turn in the dollar and a rally in the trade-weighted index (DXY) has wiped out Friday’s loss. An extension about last week’s peak of 97.56 is likely to encourage buyer’s and the next level of interest to the upside falls at 98.33 which was resistance in March 2016.
The Japanese yen was the weakest performer in European trading and the loonie was the strongest. The Australian dollar was the weakest among the major commodity currencies, attributed to the earlier bank downgrade.
The Reserve Bank of Australia will release minutes from their latest monetary policy meeting at 21:30 today which is likely to elicit a volatile price fluctuation in AUD/USD.
AUD/USD hinted of a turn on Thursday as the pair posted a bearish shooting star below important resistance. A strong rally on Friday resulted in a close near weekly highs to negate the potential reversal pattern. A four-day range has been playing out with buyers slightly ahead of the June 7th high at 0.7566. Slightly above of the level, a horizontal level at 0.7589 held price action higher earlier today.
Resistance at 0.7632 held the pair lower three times last week and all the three attempts were driven by important risk events. There are likely some stops that have been built above the level at this stage and as such, a sustained break will be important in assessing if the current recovery from May lows remains intact.