The Australian dollar has held up pretty well over the past few days against its US counterpart despite the rate cut delivered this week by the Reserve Bank of Australia and some say the reason for this is the that the US Federal Reserve may be getting ready to deliver their own rate cut.
In a speech earlier in the week Federal Reserve (Fed) Chairman Jerome Powell gave investors further reasons to believe the U.S. central bank may be on the verge of cutting rates due to the uncertainty surrounding the US/China trade deal and propped introduction of tariffs against Mexico which is starting to take its toll on the American economy.
Powell is now the 2nd Fed board member to raise concerns about the level of interest rates in the US.
"The speech only devotes one paragraph to the current situation, with the rest focused on Fed's strategy, tools and communications. Still, it was enough to see yields fall after the text was released," says Royce Mendes, an economist at CIBC Capital Markets.
"So far, only noted dove St. Louis Fed President Bullard has suggested that the conditions for an ease have been met, but today's commitment from Powell is the strongest indication that his level of concern has increased in recent weeks." He added.
One analyst believes that ay Fed rate cuts will be offset by further rate reductions in Australia which will be needed to turn the economy around and this prediction should keep any gains for the Aussie dollar short lived and should even drive the currency much lower from current levels
"The US dollar has been hit by aggressive pricing for Fed rate cuts, partly inspired by the US tariff threat to Mexico. This has helped AUD hold up against USD but it is on shaky ground multi-month given Australia's poor Q1 GDP report reinforces our view that the RBA cash rate will need to fall below 1%," says Sean Callow, from Westpac.
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