The Fate of the Aussie Dollar Hinges on the ECB

Points to consider in this Forex article:

• Traders are looking at the upcoming European Central Bank (ECB) policy meeting to drive the AUD/USD.
• News flow from China will impact upcoming Reserve Bank of Australia (RBA) policy meetings.

Last week, the AUD/USD Forex market enjoyed its largest daily rally in over four years. This Forex market rose to its highest level since July 2015. There were a series of domestic catalysts that supported the Aussie Dollar. First we had the neutral tone set at the last RBA policy meeting. This disappointed traders with dovish expectations with the after policy announcement. Secondly, was the better than expected fourth quarter (Q4) gross domestic product (GDP) release. Take these two together, and it dampens the prospects for a near term rate cut by the RBA. There was also a good bout of risk appetite as the sentiment driven Australian Dollar enjoyed a rise in the MSCI World Stock Index. This index rose to its highest level in two months.

External Forces will Impact Aussie Dollar Trading this Week

This week, the fate of the Aussie Dollar and the AUD/USD, in particular, will be looking at external forces to drive sentiment. Traders will be watching the MSCI World Stock Index as this helps to determine trends in sentiment driven currencies like the Australian Dollar. Should there be stimulus expansions from world central banks, then traders will enjoy a risk on dynamic here. This sentiment will also benefit high yield Forex markets. With that said, monetary policy tightening will have the exact opposite effect. So far, we are noting that global equities carved out a top and began to move lower in 2014 into 2015 as the US Federal Reserve (Fed) ended their quantitative easing (QE) program. Then the Fed hiked rates, causing a lot of volatility in global equity markets.

ECB Policy Meeting in the Crosshairs

This week features the ECB monetary policy decision. Traders, and the global financial markets, have geared themselves for some form of stimulus expansion. It is now up to how Mario Draghi and his crew deliver on their promise to stimulate their economy. They also made a promise to do whatever it takes to calm the roiled financial markets. In December, they did not impress when they extended the €60 billion a month QE plan and pushes rates deeper in negative territory. That move simply brought policy rates in line with the drop in borrowing costs. This was already priced into the markets and offered zero in the way of up-front boost to the QE program. The ECB will need to do a lot more this month as the fate of not only the Aussie Dollar is in play but the entire Forex universe. The ECB meeting will be a key driver of volatility in the short term.