AUD/USD at risk of further selling pressure if Fed delivers hawkish surprise

• AUD/USD is probing two-week lows in the lower-0.7400s, but remains close to its 21DMA.
• FX markets are calm ahead of the Fed; if they are hawkish, AUD could be an underperformer.

AUD/USD printed fresh two-week lows under the 0.7420 level in recent trade but has since rebounded a little and continues to trade fairly close to its 21-day moving average at 0.7428. FX markets are likely to mostly remain calm in the coming hours given the proximity of arguably the most important Fed policy announcement yet this year at 1800GMT. Fundamental catalysts for the Aussie have been light on Wednesday; Australian Housing Approvals in September saw a sharp 4.3% MoM drop due to lockdowns, but any woes were outweighed by a better than expected Chinese Caixin Service PMI report for the month of October, that saw the headline index rising to 53.8 from the flash estimate of 53.1.

If the Fed is hawkish in terms of its tone on inflation (i.e. sees upside inflation risks growing, risk that inflation is more persistent than initially thought…), AUD would be one of the G10 currencies more at risk of succumbing to the US dollar’s advances, some FX strategists have reasoned. That’s because the RBA was out earlier this week emphasising that it will not be hiking rates in 2022, rather the first hike is likely not until 2023 or even 2024, meaning the bank is likely to fall well behind the Fed with regards to monetary policy normalisation. Note that three-month eurodollar futures for June 2022 currently trade at 99.58 (versus futures for this month trading at 99.83), implying that a 25bps rate hike is pretty much fully priced in by the end of Q2 2022. Based on the same logic, currencies whose central banks are ahead of the Fed in terms of monetary normalisation, like NZD, NOK, GBP and CAD are likely to hold up better in the scenario that the Fed does deliver a hawkish surprise.

In the above-outlined scenario, AUD/USD could see an exacerbation of recent losses and move below the 0.7400 level and towards 0.7350, where the 50DMA resides, would be on the cards. Technicians continue to cite AUD/USD’s recent failure to break above the 200DMA recently in the 0.7550 area as a bearish near-term indicator.