AUDUSD gives up gains as midterm election uncertainty and cryptocurrency meltdown dampen risk appetite

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Daily currency update

After testing a break above $0.65, the AUD tracked lower through trade on Wednesday amid a correction in risk appetite. Uncertainty surrounding the US midterm election results and a meltdown in cryptocurrencies led to a move towards safe-haven assets overnight as investors eye square positions ahead of tonight’s all-important US CPI inflation update. The midterm election results are starting to trickle in, and it looks to be a much closer race than the polls predicted. The Republicans have not performed as well as expected and have opened the door to a government in gridlock, with neither side forming a majority in the House or Senate. While political uncertainty may reinforce risk aversion in the short term, the longer term effects should be market positive and could help propel the AUD higher in the new year. The AUD failed to consolidate a break above US$0.65 that fell towards the end of the domestic session before extending the decline overnight. Fears that a meltdown in cryptocurrencies could spill over into equities and other financial instruments further dampened risk appetite and forced the AUD towards intraday lows below $0.6450. With some focus on today’s domestic fare, our attention turns to US CPI inflation data. With Fed and FOMC forward guidance in the spotlight, a notable departure from market consensus is likely to trigger a significant market reaction. Another upside surprise would support calls for a longer and longer period of monetary tightening, while an easing of price pressures could prompt another rise in the AUD as calls to moderate the pace of future Fed rate hikes intensify.

Key Movers

The US dollar rose through trading on Wednesday, snapping a three-day losing streak amid midterm election uncertainty and a meltdown in cryptocurrencies. The dollar index rose as the British pound, the euro and the main commodity currencies all edged lower. The AUD and NZD gave up almost 1% overnight, while the Euro and Yen suffered modest losses and the GBP underperformed all other counterparts. GBP has seen heightened volatility over the past four weeks, a trend that does not look set to change in the near term. Sterling gave up nearly 1.5% overnight, falling back below 1.14. There appears to be no obvious catalyst for the correction outside of the general uncertainty surrounding the domestic economic outlook. Our attention today turns to US CPI inflation data. With Fed and FOMC forward guidance in the spotlight, a notable departure from market consensus is likely to trigger a significant market reaction. Another upside surprise in core inflation would support calls for a longer and longer period of monetary tightening, while an easing of price pressures could lead to another surge in dollar selling as calls to moderate the pace of future Fed rate hikes intensify.

Expected areas

  • AUD/USD: 0.6320 – 0.6550
  • AUD/EUR: 0.6380 – 0.6520
  • GBP/AUD: 1.7520 – 1.7880
  • AUD/NZD: 1.0880 – 1.1020
  • AUD/CAD: 0.8650 – 0.8750

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