AUD/USD recovers back to 0.7400 level, but set for steep weekly losses

• AUD/USD is on course to end the week sharply lower around the 0.7400 level, down about 1.6%.
• A dovish RBA on Tuesday was the major catalyst behind this week’s sharp drop.

AUD/USD is on course to end the week sharply lower around the 0.7400 level, about a 1.6% or 120 pip drop from last Friday’s closing levels around 0.7520. That marks the worst week for the pair since August.

Recapping this week's price action

AUD/USD was weighed heavily on Tuesday, falling from above 0.7500 to the low 0.7400s after the RBA delivered strong pushback against STIR market pricing for rate hikes as soon as 2022; RBA Governor Philip Lowe called the pricing an “over-reaction” to recent global inflation data and explained that it was far from clear whether or not such inflationary pressures would show up in Australia. The bank conceded that it might need to hike rates in 2023, a hawkish shift from their previous position of saying no rate hikes into 2024, but that would still leave the RBA substantially behind other major G10 central banks in terms of monetary policy normalisation, including the RBNZ, Norges Bank, BoC, Fed and BoE.

After consolidating on Wednesday, the Aussie dollar took a turn for the worse again on Thursday after the BoE roiled global rate and FX markets with a surprise decision not to hike interest rates by 15bps, triggering further global dovish repricing that seemed to hurt AUD in particular. That pushed AUD/USD down from the mid-0.7400s to under the psychological 0.7400 level. In wake of a very strong US labour market report on Friday, it seemed things were set to get even worse for Aussie, with AUD/USD at one point dropping as low as the 0.7460 level.

But a sharp drop in global developed market long-term yields led by the US has taken the wind out the US dollar’s sails and the Dollar Index, which did briefly hit a year-to-date high above 94.60 in the immediate aftermath of the jobs report, has now reversed into negative territory on the day in the 94.20s, giving tailwinds to its major G10 counterparts, including AUD. Thus, AUDUSD has been able to recover back to the 0.7400 level. FX markets now turn their attention to next week’s US October Consumer Price Inflation report on Wednesday, followed by the October Australia jobs report during Thursday’s Asia Pacific session. With regards to the former, the headline YoY rate of CPI is seen rising to a fresh multi-decade highs at 5.8%, reflecting the sharp recent rise in energy costs, as well as other rising cost pressures. It is likely to serve as a reminder that the Fed’s “transitory” argument is on shaky ground.