AUD/USD Price Forecast: Trades with caution ahead of Fed’s policy outcome

The Australian Dollar (AUD) is currently trading slightly below 0.7125 against the US Dollar (USD) during European trading hours. Market participants are cautious, as they await the Federal Reserve's (Fed) monetary policy announcement at 18:00 GMT. The US Dollar Index (DXY), which measures the Greenback's value against six major currencies, has remained near an almost two-week high at approximately 99.70.

Commerzbank suggests that a majority of the Federal Open Market Committee (FOMC) members are likely to vote to increase the federal funds rate due to the latest upside in inflation. However, the bank notes that the market reaction will depend on both the decision and the updated projections. If the dot plot suggests further hikes are likely, the US Dollar could gain strength.

The AUD/USD pair is trading under the 20-period exponential moving average (EMA) at 0.7152, indicating a mildly bearish trend. The Relative Strength Index (RSI) hovers near 48, just below the midline, suggesting fading bullish momentum. A daily close above the 20-period EMA could help alleviate downside pressure and open the way for a corrective advance. Conversely, if the pair fails to hold the immediate support level near the September 14 low at 0.7108, it may face further downside to 0.7050.

The Federal Reserve's (Fed) primary mandate is to achieve price stability and foster full employment. It adjusts interest rates to meet these goals. When inflation rises above the 2% target, the Fed raises interest rates, making the US Dollar more attractive for international investors. Conversely, if inflation falls below 2% or unemployment is too high, the Fed may lower interest rates to encourage borrowing, leading to a weaker US Dollar.

The Federal Reserve (Fed) holds eight policy meetings a year, where the FOMC assesses economic conditions and makes monetary policy decisions. The FOMC includes twelve Fed officials – seven Board of Governors members, the president of the Federal Reserve Bank of New York, and four regional Reserve Bank presidents, serving one-year terms on a rotating basis.

In extreme situations, the Fed may use Quantitative Easing (QE), which involves increasing the flow of credit in a stuck financial system. Conversely, Quantitative Tightening (QT) weakens the US Dollar.