Aussie snoozes as mini-rally fizzles

The Australian dollar is almost unchanged on Wednesday as it trades just above the 0.72 level. On Tuesday, the Aussie posted strong gains of 0.51%, its best daily performance in a week. This was courtesy of testimony from Fed Chair Jerome Powell, who reiterated the Fed’s hawkish stance and boosted risk sentiment.

Powell, who spoke at his confirmation hearing, said that he expects the Fed to normalize policy this year by ending asset purchases in March and raising interest rates over the course of 2022. Powell added that the Fed would start decreasing the balance sheet later in year, another sign of normalization.

On the inflation front, Powell said that he expected inflation to peak in mid-year. Importantly, he didn’t back four rate hikes this year and didn’t mention a March lift-off to hikes. This kept Wall Street pleased and the equity markets responded with strong gains while the US dollar retreated, as risk sentiment remained elevated.

Investors have shifted their attention to US CPI and Core CPI, which will be released later today. Inflation has been soaring and the December consensus stands at 7.0% y/y, even higher than the 6.8% gain in November. The inflation report could shake up the US dollar – a reading above 7.0% would raise the likelihood of a March hike and boost the dollar, while a release below 6.50% would support the Fed waiting until mid-year, which would be bearish for the greenback.

In Australia, Omicron infections are skyrocketing, with the country reporting over 1 million infections. Although the number of severe cases has not climbed sharply, businesses are hurting due to worker shortages, as workers have stayed at home due to sickness or quarantine regulations. This could put in a dent in Australia’s GDP, even if the government manages to avoid lockdowns due to the current Omicron wave.

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AUD/USD Technical

• There is resistance at 0.7263 and 0.7343
• AUD/USD has support at 0.7116 and 0.7049

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