AUDUSD finds support in Fed inertia

The Federal Reserve is expected to keep rates at a 22-year high at its upcoming meeting, but leave room for further increases.

With the Federal Reserve set to announce its latest policy decision on Wednesday, Wall Street expects the central bank to keep rates steady while allowing for the possibility of further rate hikes if necessary.

In September, the Fed kept interest rates steady in the 5.25%-5.50% range, the highest in 22 years, and its updated projections released at the time suggested that another additional rate hike would be needed this year to bring inflation back to the appropriate level. As a reminder, the inflation target is 2%.

In a speech at the Economic Club of New York earlier this month, Powell signaled that the central bank could hold rates steady at its next policy meeting. However, he also warned that inflation was still too high and that more interest rate increases are still possible if the economy stays surprisingly hot.

“Given the uncertainties and risks, and how far we have come, the committee is proceeding carefully,” Powell said.

“We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, and the balance of risks.”

Last week's first estimate of third-quarter GDP showed growth coming off a whopping annualized rate of 4.9 percent over the summer months and largely due to strong consumer spending as well as highlighted retail sales growth in September.

At this point in the rate hike cycle, the indicators have been stronger than officials might have imagined, raising the possibility that if the economy remains hot, lowering inflation could be more difficult or take longer.

The Fed's preferred measure of inflation, the "core" PCE, showed prices rose 0.3 percent in September compared to the previous month. That was the highest in four months, while annual price growth slowed slightly to 3.7% from 3.8% in August.

Fed forecasts published in September suggest interest rates will fall by 0.50% next year.

Commodity currencies traditionally act as a counterbalance to the US dollar. In this situation, the growth of AUDUSD is often associated with the rising gold prices against the background of the weakening dollar.

Overall Recommendation is to buy AUDUSD provided that the Fed will announce its intentions to soften the policy at the upcoming meeting.

Profit or loss could be taken at the end of the year.