AUD/USD stabilises just above 0.7100 amid better risk tone, eyes key Fed/RBA meetings next week

• Better risk appetite and more favourable commodity market conditions is helping the risk/commodity-sensitive Aussie resist the buck’s latest advances.
• AUD/USD pared earlier losses and is back to trading above 0.7100, though still a tad lower on the day.
• Ahead of next week’s Fed and RBA meetings, bears are eyeing annual lows just under 0.7000.

Better risk appetite in US equity markets and stabilisation in the broader commodity complex is helping the risk and commodity-sensitive Aussie resist the US dollar’s latest advances and is outperforming the likes of the euro, pound and yen. AUD/USD was last trading just above the 0.7100 level, down about 0.3% on the day, having pared earlier losses that saw the pair hit its lowest levels since early February in the 0.7060s.

FX volatility remains elevated with the US dollar the clear winner and, though better on Thursday, the general tone to risk appetite in recent weeks has been weak as investors fret about weakening global growth, central bank tightening, geopolitics and China lockdown risks. Regarding growth fears, US Q1 GDP numbers released earlier in the session weren't pretty and showed a surprise drop in output, though analysts put this down to surging imports and a slowing of inventory building.

Nonetheless, against this backdrop, many AUD/USD bears will continue to target a test of sub-0.7000 annual lows in the coming weeks. The Fed will likely hike interest rates by 50 bps next week, will likely signal that further 50 bps moves are coming and will announce plans on monetary tightening. This could easily keep the USD rally going, analysts suspect.

But one fact that might make a breakout below 0.7000 a little more difficult to muster is the fact that the RBA might also be raising interest rates next week, more than one month earlier than expected by most analysts just one week ago. Wednesday’s spicey Q1 2022 Australian Consumer Price Inflation numbers are the reason for the hawkish shift in policy expectations.

A 15 bps rate hike to 0.25% is now fully priced in and rates seen ending the year at 2.5%, roughly in line with where the Fed has interest rates. Should the RBA live up to or even exceed the hawkish hype, this lessens the argument for AUD/USD to head lower in the near term, suggesting 0.7000 could become a key area of support.