**AUD/USD Extends Rally Amid Increasing Fed Rate Cut Expectations**
*Original source: Forex Factory; Author: Justin Low*
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The Australian dollar (AUD) has continued its upward momentum against the US dollar (USD) in recent trading sessions, as a growing number of investors bet on interest rate cuts by the US Federal Reserve (Fed) in the coming months. This trend reflects a major shift in market sentiment and has prompted traders and analysts to reassess the outlook for AUD/USD and global forex markets at large.
**Key Drivers Behind AUD/USD Rally**
Several factors have contributed to the Australian dollar’s sustained rally:
– **Fed Rate Cut Expectations**: The primary catalyst for AUD/USD strength has been rising speculation that the Federal Reserve will begin cutting interest rates sooner rather than later. Slowing US economic data and signs of easing inflation have reinforced the belief that the Fed’s tightening cycle may have peaked.
– **Divergence With RBA**: While the Reserve Bank of Australia (RBA) is taking a cautious approach to monetary easing, the perceived divergence in monetary policy between the RBA and the Fed is lending support to the Australian dollar.
– **US Dollar Weakness**: As traders trim long USD positions, the greenback has come under pressure, supporting currency pairs like AUD/USD.
– **Risk-On Sentiment**: Scheduled releases and stronger global risk appetite, fueled by gains in equities and commodities, have also helped prop up AUD/USD.
– **Higher Commodity Prices**: Australia’s economic dependence on commodities means that firmer prices for iron ore, coal, and other exports often translate to a stronger currency.
**Fed Rate Cut Narrative Gains Traction**
After the Federal Reserve’s latest policy meeting, the central bank opted to keep rates on hold. However, accompanying statements and recent economic indicators suggest that the cycle of aggressive rate hikes may have reached its conclusion. A series of recent US economic reports have reinforced expectations of a pivot toward monetary easing:
– **Labor Market Data**: Recent US Non-Farm Payrolls (NFP) numbers, although still robust, have shown signs of cooling, while initial jobless claims have started to rise modestly.
– **Inflation Trends**: Consumer price index (CPI) and producer price index (PPI) figures indicate that inflation is retreating closer to the Fed’s 2 percent target.
– **Retail Sales and Manufacturing**: Slower growth in retail sales and a loss of momentum in the manufacturing sector point to a decelerating economy.
This confluence of factors has pushed traders to ramp up their bets on at least one Fed rate cut by the September policy meeting, with some even expecting moves as soon as July. The CME FedWatch Tool, which tracks expectations in the fed funds futures market, shows that the probability of at least one cut this year now stands above 90 percent.
**Australian Dollar’s Response and Technical Outlook**
In response, the AUD/USD pair has registered notable gains, climbing from below the
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