In European trading Tuesday, the dollar eased ahead of the latest Federal Reserve meeting. At the same time, the Australian dollar dropped sharply after the Central Bank tightened monetary policy less than many expected.
The Reserve Bank of Australia did not raise interest rates, stressing that inflation was still too low to raise rates soon.
Yet, the RBA dropped its policy of controlling the yield curve, saying it would no longer cap the three-year government bond yields. Even though a more aggressive stance was expected given the solid inflationary pressures at home, the bank only removed its previous projection of rates not being raised until 2024.
The RBA meeting overnight marked a policy change compared to the previous meeting. Still, the slow pace of tapering assets and cautious outlook on inflation and wages were relatively dovish compared to what the market was pricing the Aussie at, driving the bank away from its yield-curve-control policy.
EUR/AUD bullish setup
EUR/AUD has merged an attractive setup regarding RBA dovish tone. The buyers managed to violate the long-term downtrend line and break above the critical 1.55185 resistance level, starting a new rally toward 1.55630 1.56200. On the downside, the recent bottom at 1.53550 is considered key resistance. less than expected reading for Germany's PMI and Euro's PMI allowed the euro to give up some gains before resuming its upward move.
AUD/USD is set for more decline
The latest Federal Reserve policy-setting meeting begins on Tuesday, and it is perhaps a clear potential to weigh on the Aussie. Following the recent break of the 0.75850 support level, the next support could be projected at 0.74350 near the highs of mid-September. It all depends on how the FOMC affects the USD for further developments.
With inflation at a 30-year high, the Fed will probably have to rethink its approach to rising prices, and therefore when to start raising interest rates. A more hawkish tone could motivate traders to sell more AUD for the US dollar and push Aussie lower.