AUD/USD comes closer to 0.6800 as Fed’s neutral policy stance to trim Fed-RBA policy divergence

• AUD/USD has climbed to near 0.6800 ahead of the Federal Reserve policy.
• The catalyst that is driving minor caution in the risk profile is the Fed’s dot plot, which is likely to remain hawkish.
• Steady labor market conditions and a surprise jump in inflationary pressures would force the RBA to raise rates further.

The AUD/USD pair has jumped to near the round-level resistance of 0.6800 in the European session. The Aussie asset is likely to extend gains further as the US Dollar Index (DXY) is looking to resume its downside journey. Less-confident recovery move in the USD Index seems concluding now as a neutral interest rate policy projection by the Federal Reserve (Fed) is still intact.

S&P500 futures have trimmed some gains as investors are turning cautious ahead of the interest rate decision by the Fed. The overall market mood is still cheerful as the Fed’s policy-tightening spell is expected to find a temporary pause.

The catalyst that is driving minor caution in the market sentiment is the Fed’s dot plot, which is likely to remain hawkish. Analysts at Danske Bank expect the Fed to maintain rates unchanged. The focus will be on communication around potential hike in July & the updated dots. The Fed is unlikely to close the door for hikes, but we doubt they will materialize.

The USD Index is hovering near its intraday low around 103.10 and is expected to test the crucial support of 103.00. The impact of the Fed’s neutral policy projection is also visible on US Treasury yields. The return provided on 10-year US Treasury bonds has dropped below 3.81%.

On the Australian Dollar front, investors are awaiting May’s Employment data. As per the preliminary report, the Australian economy added 15K fresh payrolls vs. a lay-off of 4.3K. The Unemployment Rate is seen steady at 3.7%. Steady labor market conditions and a surprise jump in inflationary pressures, recorded for May, would force the Reserve Bank of Australia (RBA) to raise interest rates further.