A sharp unwind in Fed easing expectations hammered overnight, with three failures above .7160 leaving the pair vulnerable to a deeper pullback.
- Fed rate cut pricing collapses to 18bp for 2026, hitting AUD/USD
- Three failures above .7160 followed by bearish engulfing candle
- .7000 support zone and 50DMA now key near-term downside focus
Summary
AUD/USD was hammered on Thursday as markets sharply unwound expectations for , leaving front-end US rate pricing as the dominant driver for the pair this week. After three failed attempts above the February 2023 high of .7160 and a bearish engulfing candle on the daily tivk, the technical picture now points to the risk of a deeper retracement, although momentum indicators are yet to signal a decisive bearish shift. Traders will also be watching the report, particularly consumption and income data, to see whether inflation fears intensify or whether the recent unwind in Fed easing bets has gone too far.
Fed Rate Cut Bets Unwind
AUD/USD was taken to the woodshed overnight, with the sharp pullback coinciding with another aggressive unwind in expectations for Federal Reserve rate cuts.
Markets are now pricing just 18 basis points of easing by year-end, down from around 60 basis points at the start of March, a sizeable shift in a short space of time. That move in front-end US rate pricing has had the strongest relationship with AUD/USD this week, sitting above correlations with longer-dated US yields, yield spreads and even moves in energy markets.
Source: TradingView
That’s notable because earlier in the week the Australian dollar appeared to enjoy some support from both a lift in energy prices and a sharp jump in domestic rate hike expectations. Based on the correlations seen over the past few sessions, those influences appear to matter far less right now.
When you layer in the broader backdrop, the price action makes more sense. Riskier assets took a beating on Thursday, particularly cyclical sectors, while AUD/USD itself had already shown signs of fatigue following multiple failed breakout attempts on the daily chart.
Put together, fading bullish momentum, a sharp repricing in Fed expectations and losses across cyclical assets proved a toxic mix for the Aussie, helping explain why it was dumped so aggressively during the session.
Failed Breakouts Trigger Pullback
Source: TradingView
The technical picture for AUD/USD is fairly straightforward. The pair ran hard earlier in the week, pushing above the February 2023 swing high of .7160 on multiple occasions, but delivered three failures above the level before printing a bearish engulfing candle on Thursday, pointing to the risk of a deeper retracement.
While the pair looks a little toppy in the near term, I’m putting slightly less weight on the signal given the volatile market regime we currently find ourselves in, where sentiment can change on a single headline, post or “truth”. What we do know is that upside strength continued to wane into the highs, adding to the sense that a deeper pullback could occur.
Even so, the message from RSI (14) and MACD is anything but a slam dunk when it comes to leaning aggressively bearish.
On the topside, .7160 remains the obvious level to watch. A break and close above the figure would likely rebuild confidence in an extension of the broader bullish move underway since November, putting the June 2022 high of .7282 back on the radar.
If Thursday’s bearish price signal and cautious message from the oscillators prove accurate, it’s worth remembering the pair was bid below .7000 earlier this month. Minor uptrend support and the 50-day moving average sit nearby, creating an interesting support zone to watch when it comes to near-term directional risks.
PCE Data Looks Particularly Stale
While the Fed’s preferred underlying inflation measure, the deflator, is released later Friday, the January report already looks particularly stale in light of recent developments. A chunky 0.4% monthly increase is expected, matching the pace seen in December, which would see the annual rate tick a tenth higher to 3.1%, well above the Fed’s apparent 2% target.
Two things are worth remembering with this release. First, it rarely surprises relative to consensus these days. Second, the data released earlier this week for February suggests we could easily see another 0.4% print in the next report, even before any inflationary surge linked to higher energy prices starts to filter through.
With inflation concerns helping drive the recent unwind in Fed rate cut pricing, markets may instead pay closer attention to the consumption and income figures found within the report. Strength would likely amplify inflation fears, while weakness may prompt markets to reassess whether the recent unwind in easing expectations has gone too far. Or it could simply add to concerns about stagflation.
As such, the January survey will also be important given the market’s recent sensitivity to labour market data.
More broadly, developments surrounding the Iran conflict and energy supply from the Gulf remain the key focus for markets. Positive news flow would likely support the Aussie against the but could weigh on the crosses, while the opposite would apply should the situation deteriorate further.
