AUD/USD likely to trade around 0.74 by end-2018 – Lloyds Bank

Increasing concerns regarding ‘frothy’ global equity valuations and uncertainty about U.S-China trade tensions pushed the AUD/USD pair down to 0.70; however, from there, the pair has rallied sharply, noted Lloyds Bank in a research report.

While the risk sentiment has steadied, market positioning is believed to have been a significant factor. The velocity of the recent rally implies that the market is unwinding its entrenched ‘net short’ AUD position, stated Lloyds Bank. If this is the case, near-term risks the Australian dollar are tilted to the upside. However, with the domestic economy subdued, it is tough to see the Australian dollar outperforming over the medium term.

The Australian central bank has reaffirmed its belief that the next move in interest rates would be higher but the market is not ‘fully pricing’ the first hike until early 2020. Meanwhile, the U.S. Fed continues to act in lie with its ‘dot plot’.

“With expectations that the Fed funds rate will rise by another 50bps in 2019, the US-Australian interest rate differential could diverge from current levels, further pressuring the pair. Considering the forces in play, we believe AUD/USD will settle around 0.74 at year-end”, added Lloyds Bank.

At 14:00 GMT the FxWirePro's Hourly Strength Index of Australian Dollar was neutral at 15.0613, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at 1.28534. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex