What Impact will Prospective US Interest Rise Have on the AUD?

AUDGBP Bounces as Australia Deals with Floods

With so much market focus on tonight’s US FED interest rate decision and the impact it will have on GBP exchange rates, I thought it would be poignant to look at the potential reaction it will have on other major currencies, in particular the AUD.

Making the assumption that the FED will raise their base rate by 0.25%, you can certainly argue that this will increase the USD’s value across the board. Whilst I would expect an immediate spike following this, I do feel the markets have now factored in this position and a 0.25% rise will not actually cause too much of a stir on the exchange. What clients and investor’s will be looking towards is the subsequent monetary policy statement. This will give us a real insight into the current mind set of the FED and whether they see the initial rate rise as the start of a positive domino effect, or whether it is a measure taken merely to ‘test the water’.

Personally I feel it is unlikely the FED will commit to any future hike, until they have had time to digest the market reaction and more importantly whether the US recovery jumps forward another step off the back of it.  If they remain dovish in their comments I expect the AUD to weaken, as investors will sell off their riskier assets such as the AUD and move their investments to the safe haven provided by the greenback.

If we look at GBP/AUD we can see that the AUD has found support over recent weeks around 2.10 and I do feel the highs we saw in the summer are a thing of the past. I would be tempted to lock in any AUD purchase whilst the pair remains above 2.05 and not gamble on has become and extremely unpredictable market.

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