Australian Dollar Outlook: AUD/USD May Rise on Dovish Fed Speak After Huge NFP Miss

16 May 2021

The Australian Dollar pushed higher this past week, with AUD/USD touching its highest since the end of February. Risk appetite was supercharged, counterintuitively, by a record miss in April’s US jobs report. The nation only added 266k positions versus economists’ estimates of 1 million. This is as the unemployment rate rose to 6.1% from 6.0% prior. Expectations were set at 5.8%.

In today’s market environment, such a profound undershoot from a critical economic data print likely opens the door for the Federal Reserve to maintain its dovish monetary policy stance for longer. The central bank has been downplaying rising inflation bets, with policymakers expecting a pickup in CPI to be transitory. This means that investors may not have to worry as much about the risk of rising borrowing costs for now.

Since the beginning of April, odds of a Fed rate hike by the end of next year have been plummeting, by as much as 50%. Why is this important for the Aussie Dollar? The currency can be very sensitive to broader risk appetite. On the chart below, I have demonstrated this by comparing an AUD index versus Wall Street, Fed rate hike bets and Australian 10-year government bond yields.

With that in mind, there may be room for the markets to continue reducing hawkish Fed policy bets. This is especially amid a very busy week ahead for speakers. Fed presidents from Chicago, San Francisco, New York and Dallas will be talking. Fed Vice Chair Richard Clarida and Board of Governor member Lael Brainard will also be speaking. Check out the DailyFX Economic Calendar for updates on when policymakers will speak.

Should an unexpectedly higher US CPI reading print on Wednesday, the Fed’s rhetoric could undermine its impact on markets. The same goes for retail sales on Friday. Data tends to drive financial markets to the extent it can alter monetary and fiscal policy bets. The Australian docket is fairly light, with the nation also reporting retail sales. AUD’s focus will likely remain glued on the Dow Jones, S&P 500 and Nasdaq Composite.