Reserve Bank of Australia and Federal Reserve divergence

In recent trade, Federal Reserve's chair Jerome Powell said that the US central bank will stay the course until the job is done. However, Fed's Powell added that the ultimate level of interest rates is likely to be higher than previously anticipated. Federal Reserve's chairman Jerome Powell also said that the Fed is prepared to increase the pace of rate hikes if data indicates it is warranted:

 "The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes."

Federal Reserve's chairman Jerome Powell's comments come after the bank slowed the pace of its tightening to 25 basis points at its last two meetings, following larger hikes last year. Fed funds futures traders have now raised bets that the Fed will hike rates by 50 basis points at its March 21-22 meeting to 56% and a 25 basis points increase is now seen as just a 44% likelihood. Traders are now also pricing for the rate to peak at 5.57% in September and the US Dollar is firmly bid as result.

Meanwhile, prior to Federal Reserve's chairman Jerome Powell's hawkish testimony, the Reserve Bank of Australia, RBA, had already sawn the seed for a disparity between the Aussie and US Dollar. AUD was the weakest G10-performing currency due to what was perceived as a move towards a more dovish stance from the RBA at Tuesday's interest rate meeting. 

The Reserve Bank of Australia's policy-makers hiked interest rates by 25 bps. This was the 10th consecutive tightening but there was a switch up in the language which motivated the market to position for the possibility of a lower peak in rates which in turn weighed on AUD. The RBA has put down the foundations for a forthcoming pause in policy moves. 

''In our view, the Fed is set to stick with its hawkish guidance for now suggesting that AUD/USD could remain on the back foot into the middle of the year,'' analysts at Rabobank said. 

''That said, on a relative basis, the Australian economy remains fairly well positioned in terms of growth and we expect AUD/USD to pick up some ground in the latter part of the year,'' the analysts argued, adding that this forecast assumes that Fed rates have peaked by then.