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Australian and New Zealand Dollars Retain Strength as Powell Calls for Rate Patience

May 2, 2024

Jerome Powell, Chair of the U.S. Federal Reserve, has reassured the financial markets by emphasising a likely downward adjustment in future interest rates. This guidance follows a series of inflation reports that had stoked expectations of tighter monetary policy.

Chart showing AUDUSD prices on the rise as recorded on VT Markets trading app.

Picture: AUDUSD prices on the rise as recorded on VT Markets trading app.

In the currency markets, the Australian dollar remained robust, maintaining its overnight gain of 0.8% and stabilizing at $0.6529, briefly touching $0.6540. This performance allowed it to surpass the 200-day moving average of $0.6522, suggesting a continuation of its upward trajectory.

The New Zealand dollar showed stability at $0.5926, holding steady after a 0.7% increase, though it approached the 20-day moving average of $0.5944 without breaking through, indicating potential resistance at this level.

Powell’s Stance on Interest Rates

Powell’s comments came after the Federal Reserve decided to hold interest rates steady, a move that had been widely anticipated. His assertion that an increase in rates was unlikely in the near term provided relief to those concerned about a possible hawkish pivot in response to recent high inflation figures.

Dollar Index Falls, Yen Surge

The broader impact on the U.S. dollar was negative, with the dollar index falling 0.6% against major currencies. This decline was exacerbated by a sharp rise in the yen, likely spurred by intervention from Japanese financial authorities, highlighting the sensitive balance central banks maintain in global currency markets.

Australian government bonds mirrored the positive response seen in U.S. Treasuries, with yields on three-year bonds falling 5 basis points to 4.072% and ten-year yields also decreasing by the same margin to 4.460%. These movements reflect a flight to safety and investor alignment with Powell’s cautious stance.

Australia’s Economic Outlook

Australia reported a significant narrowing of its trade surplus in March to the lowest point in more than three years, which might pose challenges for economic growth in the first quarter. Additionally, a smaller-than-expected increase in building approvals by 1.9% in March suggested that issues in the housing market, particularly supply shortages, continue to exert upward pressure on property values.

You might be interested: Australian Shares Rise with an Eye on Upcoming Federal Reserve Meeting

The upcoming policy decision by the Reserve Bank of Australia is now in sharper focus, with market participants anticipating a potential shift towards tighter monetary policy in response to inflation concerns. 

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