Market Briefing: US Fed rattles market nerves

Have a look at our latest Event Radar & Views In A Nutshell pack

• Hawkish vibes. US Fed interest rate forecasts revised up. New Chair Warsh doesn't overtly push back. US equities dip. USD stronger. AUD weaker.

• Cross-currents. Solid US retail sales. Scope for markets to price in more US Fed rate hikes. AU-US yields spreads narrowing. Pressure on AUD.

Global Trends

• Markets were somewhat rattled overnight by ‘hawkish’ vibes from the US Fed, especially the lack of a ‘dovish’ pushback from new Chair Warsh during the press conference. US equities lost ground (S&P500 -1.2%), bond yields rose, particularly at the front end of the curve (US 2yr +13bps to ~4.18%, a high since February 2025), and the USD strengthened. EUR (now ~$1.1502) dipped towards the bottom of its ~3-month range, USD/JPY edged higher (now ~160.62), the NZD fell by ~1% (now ~$0.5770) with a solid NZ GDP print doing little to alter the mood (the NZ economy grew by 0.8% in Q1), and the AUD declined to the lower end of the range it has occupied since mid-April (now ~$0.7015).

• As expected, the US Fed kept the policy target range unchanged at 3.50-3.75%, with the committee voting unanimously to hold steady. The short accompanying statement removed forward guidance and references to additional rate adjustments, while also reiterating inflation is elevated and that there is a commitment to price stability. Notably, the updated projections, particularly the interest rate forecasts (which Chair Warsh isn’t a fan of, didn’t participate in, and indicated might be done away with by year-end) showed a sea change in the committee’s outlook. Because of inflation persistence the median “dot” for 2026 showed half a rate hike, with 9 out of 18 participating officials forecasting higher rates this year (6 are projecting 50bps of hikes or more), and the “dot” for 2027 also moved up to a level on par with the current Fed funds rate. In his press conference, Chair Warsh leaned 'hawkish', stressing there is work to do on inflation and the importance of restoring price stability.

• Already ‘hawkish’ rates markets repriced even more. Reflecting the changing balance of probabilities, markets are fully factoring in a US Fed rate increase by October, yet a second move still isn’t discounted with only ~46bps of tightening priced by next March. We think there is scope for markets to bake in even more potential tightening by the US Fed, particularly given the positive economic signals. The latest US retail sales figures showed consumer spending (the engine room of the economy) was robust and broad-based in May. In our view, a further upward adjustment in US rate expectations could be USD supportive.

Global event radar: BoE (Tonight), US PCE (25th June), China PMI (30th June)

Trans-Tasman Zone

• In the wake of ‘hawkish’ update and rhetoric from the US Fed US interest rate expectations and the USD rose, while cyclical assets such as equities and growth-linked currencies like the AUD and NZD lost ground (see above). At ~$0.7015 the AUD is back down near the lower end of its ~2-month range while the NZD (now ~$0.5770) is at the lower end of the range it has occupied since mid-April and ~1 cent below its 1-year average.

• A solid Q1 NZ GDP report, released this morning which showed the economy expanded by 0.8%, helped the NZD somewhat stabilise. In time, we remain of the view that the broadening signs of a recovery in the NZ economy, a healing NZ labour market, and inflation pressures should see the RBNZ deliver a series of interest rate hikes with a move as soon as the 8 July meeting possible. The diverging macro trends should, in our opinion, see AUD/NZD (now ~1.2159) steadily drift lower from its current elevated levels over the next year or so.

• The May CPI inflation data is the next major Australian economic release (due 24 June). The report should again show inflation is “too high”, however other signals across the economy such as sluggish consumer activity, shifting housing market trends, and loosening labour market conditions suggest that while the door to delivering more tightening is open it doesn’t necessarily mean the RBA will walk through. Markets agree with only ~15bps of further rate rises by the RBA discounted by next February. By contrast, we think there is potential for markets to factor in more possible rate rises by the US Fed given the ‘hawkish’ vibes, upturn in the US economy, and lingering inflation. On balance, based on these cross-currents we think yield differentials (which are already suggesting the AUD may be too high) might have peaked and could turn even more against the AUD. This may be compounded by a slowdown in Australian growth and challenges faced by the global/Asian economy from the prolonged Middle East conflict and disruptions to energy/supply-chains. We believe the AUD is facing more downside than upside risks over the near-term.

AUD & NZD event radar: BoE (Tonight), AU CPI (24th June), US PCE (25th June), RBA Gov. Bullock (28th June), China PMI (30th June)

AUD levels to watch (support / resistance): 0.6930, 0.6980 / 0.7080, 0.7140

NZD levels to watch (support / resistance): 0.5710, 0.5750 / 0.5830, 0.5880

Market Moves

Peter Dragicevich

Currency Strategist - APAC

peter.dragicevich@corpay.com

Upcoming Events

THURSDAY (18th June)

GBP Jobs Report (Apr/May) (4pm)

EUR ECB’s Kocher Speaks (5pm)

GBP BoE Decision (9pm)

USD Initial Jobless Claims (10:30pm)

USD Philly Fed Outlook (June) (10:30pm)

FRIDAY (19th June)

USD Leading Index (May) (12am)

NZD Exports/Imports (May) (8:45am)

JPY CPI Inflation (May) (9:30am)

GBP Retail Sales (May) (4pm)

CAD Retail Sales (Apr) (10:30pm)

SATURDAY (20th June)

EUR ECB’s Lane Speaks (12:30am)

*Note, all times/dates provided are AEST