Forex Market: AUD/USD trades near 18 1/2-month highs as markets await the FOMC Minutes, debate over US fiscal stimulus continues

AUD/USD extended gains from the prior three trading days and remained close to yesterday’s 18 1/2-month highs on Wednesday amid continuing political wrangling over the next US coronavirus aid bill, as market players awaited the Minutes from the Federal Reserve’s most recent meeting for further clues over policy.

Speculation has emerged that an average inflation target may be adopted by the US central bank in an attempt to drive inflation above 2% for some time.

The US Dollar, a traditional safe haven, has retreated and riskier assets have surged to record highs after the Fed intervened into global markets to maintain liquidity in support of pandemic-ravaged US economy.

“While I don’t think the dollar will drop steadily, there’s a high possibility of a gradual weakening to continue,” Minori Uchida, chief currency analyst at MUFG Bank, said.

He also noted that interest rates would likely remain at current lows for a prolonged period after which yield curves in long- and medium-term rates could flatten.

Meanwhile, political stalemate over a new round of fiscal stimulus in the United States continued. House of Representatives Speaker Nancy Pelosi said yesterday that congressional Democrats were willing to cut their coronavirus relief bill in half so that an agreement with White House could be reached.

Additionally, there has been a muted market reaction to Joe Biden’s formal nomination for president.

As of 7:04 GMT on Wednesday AUD/USD was edging up 0.12% to trade at 0.7251, while moving within a daily range of 0.7232-0.7260. Yesterday it climbed as high as 0.7265, its strongest level since February 5th 2019. The major pair advanced 3.48% in July, which marked its fourth consecutive month of gains. The pair has risen another 1.54% so far this month.

On today’s economic calendar, market players will be expecting the release of the Fed Minutes at 18:00 GMT, as they will be looking for any clues over an expected shift in the policy outlook. The Federal Reserve kept the target range for the federal funds rate intact at 0%-0.25% at its policy meeting concluded on July 29th, in line with market expectations, and reiterated its commitment to use the entire range of policy tools in support of the economy.

The Fed also indicated that borrowing costs would remain close to zero for as long as necessary, so that the economy could weather the negative effects from the COVID-19 pandemic and is again on track to achieve the bank’s maximum employment and price stability objectives.

Bond Yield Spread

The spread between 2-year Australian and 2-year US bond yields, which reflects the flow of funds in a short term, equaled 14.6 basis points (0.146%) as of 6:15 GMT on Wednesday, up from 14.2 basis points on August 18th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7239
R1 – 0.7269
R2 – 0.7295
R3 – 0.7325
R4 – 0.7355

S1 – 0.7213
S2 – 0.7183
S3 – 0.7157
S4 – 0.7131

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