AUD/USD clings to small gains above 0.7250 as FOMC looms

• Trading volume thins out ahead of the critical FOMC meeting.
• US Dollar Index steadies in the positive territory.
• RBNZ is expected to keep the  policy rate unchanged.

After touching its highest level in five days at 0.7283, the AUD/USD pair went into a consolidation phase as investors are staying away from markets while waiting for the FOMC to announce its monetary policy decisions. As of writing, the pair was up 0.07% on the day at 0.7255.

Earlier today, the only data from the U.S. showed that new home sales increased by 3.5% in August after declining by  1.6% in July and surpassed the analysts’ estimate of 0.5%. However, markets didn’t pay attention to this data and the US Dollar Index stayed calm in the upper half of its daily range. At the moment, the DXY is up 0.13% on the day at 94.27.  

Although the Fed is widely expected to announce a 25 bps hike to its key funding rate, the updated dot plot and Chairman Powell’s policy remarks are likely to trigger sharp fluctuations in USD denominated pairs. Previewing today’s event,  “For now, we stick to our forecast of 3 hikes this year, but if the Fed remains sanguine about the escalating trade wars a fourth hike becomes more likely. Last but not least, the meeting should also lead to the next step in the balance sheet normalization program that was announced in September last year. Since October 2017 only principal payments that exceed a gradually rising cap are reinvested,” Rabobank analysts said in a recently published report.

Later in the day, investors will also be closely watching the RBNZ meeting. Any reaction from the NZD/USD pair to the RBNZ’s policy statement could force the positively-correlated AUD/USD pair to show similar moves.  

“Many market participants appear to have taken the dovish guidance from the RBNZ governor at face value;  rates  markets are implying a small probability of a rate cut and speculative short positions in NZD look substantial. This leaves NZ markets vulnerable to a more positive shift in tone from the RBNZ,” Nomura analysts note.

Technical levels to consider

The initial resistance for the pair aligns at 0.7270 (50-DMA) ahead of 0.7355 (100-DMA) and 0.7440 (Aug. 7 high). On the downside, supports could be seen at 0.7235 (Sep. 25 low), 0.7190 (20-DMA) and 0.7140 (Sep. 17 low).