AUD is this year’s top-performing currency, appreciating 5.2% YTD against the USD as of February 3. AUD/USD has traded in a 0.69-0.71 range since January 26, following a rally from 0.67 amid USD-debasement concerns. The Reserve Bank of Australia’s 25-bps hike to 3.85% yesterday may open the door for AUD/USD to trade into a higher 0.70-0.75 range after three years of trading in sub-0.70 levels. The futures market is not ruling out another hike at the May 5 meeting after RBA Governor Michele Bullock framed the move as an insurance hike to prevent inflation from running away as it did after the Covid-19 pandemic.
Although stronger US data has underpinned the USD, Fed Chair Jerome Powell hinted at an extended pause at the January 28 FOMC meeting, following three rate hikes in September-December. US President Donald Trump expects his Fed Chair nominee, Kevin Warsh, to resume rate cuts. However, it has been unclear whether the US Senate will begin the confirmation hearing for Warsh to succeed Powell in mid-May, as it faces opposition from Senators Thom Tillis (Republican) and Elizabeth Warren (Democrat) over the legal cases against Powell and Governor Lisa Cook. The Fed’s independence remains a critical issue weighing on the USD. Meanwhile, unlike the upside surprises in Monday’s ISM Manufacturing PMI, today’s ISM Services PMI may cool after three consecutive increases.
EUR/USD found support around 1.18 after its week-long decline from 1.2080. Despite some concerns that the EUR’s strength over the past year has dampened inflation, the European Central Bank is unlikely deviate from its stance that the Euro Area is “in a good place” at Thursday’s Governing Council meeting. Although today’s CPI estimate is expected to decline to 1.7% YoY in January from 1.9% in December, core inflation is expected to remain unchanged at 2.3%, above the 2% target. The ECB’s Consumer Expectations Survey also showed December’s inflation expectations rising 2.8% from 2.8% a month ago for the next three years, and to 2.4% from 2.2% over the next 5 years. Not surprisingly, the market is not pricing a rate cut or hike this year. Following Chinese President Xi Jinping’s call on Sunday for the CNY to become a “powerful” global currency, ECB President Christine Lagarde may again advocate a “global euro moment.” 
Against this background, the AUD/EUR cross rate may be building upside momentum to test the 0.60 resistance. The currency pair stabilized around 0.55 after Liberation Day, ending its three-year decline from 0.70.
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