AUD USD pressured in Fed aftermath

AUD/USD plunged on Thursday as the US dollar surged in the aftermath of Wednesday’s interest rate hike by the Federal Reserve that lifted benchmark US interest rates by a quarter of a percentage point.

This rate hike itself had been widely-expected and largely priced-in to the strong US dollar even prior to the Fed’s announcement, but a couple of factors hinting at a slightly more hawkish Fed stance than had been anticipated led to a subsequent rise in the greenback.

Despite Federal Reserve Chair Janet Yellen’s repeated use of the word, “gradual,” in describing the pace of monetary tightening, the Fed’s projected pace of tightening and target rate for 2016 appear somewhat less than gradual. Also, the fact that Fed members were unanimous in their backing of a rate hike on Wednesday lends a tone of hawkish resolve to the Fed’s disposition.

On the Aussie side, although the Reserve Bank of Australia (RBA) kept rates on hold early this month due to recent positive economic data, especially on the employment front, the central bank has reiterated its capacity for cutting interest rates and easing monetary policy further should persistently weak inflation deem it necessary.

Overall, this points to a continued divergence in monetary policy between the Fed and the RBA, which should continue to weigh on AUD/USD. Thursday’s substantial drop brought the currency pair down below its key 50-day moving average to approach the bottom border of a parallel uptrend channel that has been in place since September’s six-year low around 0.6900.

On any breakdown below this channel, the next major downside objective resides at the key 0.7000 psychological support level, last approached in early November. With the long-term and short-term trends continuing to point to the downside, AUD/USD could soon see new multi-year lows. Any further decline below 0.7000 could then target key support around the 0.6800 level, which would confirm a continuation of the long-term downtrend.