AUD Q2 2021 Fundamental Forecast

It remains to be seen if the RBA will provide additional monetary support in 2021 as the Board called a negative policy rate “extraordinarily unlikely.” Governor Lowe and Co. may retain a wait-and-see approach throughout the first half of the year as the central bank relies on its emergency tools to achieve its policy targets.

In turn, the Australian Dollar may continue to exhibit the bullish price action seen earlier this year as major central banks remain reluctant to scale back their non-standard measures. Key market themes may continue to influence AUD/USD as the US Dollar broadly reflects an inverse relationship with investor confidence.

Federal Reserve Forward Guidance to Influence AUD/USD Outlook

Federal Reserve forecasts indicate the Federal Open Market Committee (FOMC) is on a similar path to the RBA as officials see the benchmark interest rate staying close to zero through 2023. The wait-and-see approach for monetary policy may keep AUD/USD afloat as long as the Fed stays on track to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month.

FOMC Projections for Target Level of Federal Funds Rate (March 2021)

AUD Q2 2021 Fundamental Forecast

Source: FOMC

It looks like the FOMC will do little to curb the rise in US Treasury yields. The central bank insists that the recovery has “progressed more quickly” than generally expected. Fed officials may strike a less dovish tone over the coming months as “forecasts from FOMC participants for economic growth this year have been revised up notably since our December Summary of Economic Projections (SEP).”

In turn, a further rise in longer-dated US Treasury yields may produce headwinds for AUD/USD ahead of the next Fed interest rate decision on April 28. More of the same from Chairman Jerome Powell may keep key market trends in place as the next SEP update comes in June.

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