• AUD/USD has dropped back from highs in the 0.7270s to under 0.7250 after Powell’s renomination as Fed Chair.
• Dollar strength represents an unwind of dovish Brainard bets, as well as bets on a hawkish Fed shift.

AUD/USD has reversed lower from previous session highs in the 0.7270s, amid a knee-jerk strengthening of the USD after the announcement from the White House that Jerome Powell would be nominated for a second term as Fed Chair. AUDUSD has now slipped back to the 0.7240s, where it still trades with on-the-day gains of about 0.15%. Analysts said that AUD outperformance on Monday could be to do with stronger iron ore prices, as well as positive reopening news in the region.

According to Westpac; “the A$ should remain under modest pressure given further weakness in Chinese steel prices/ super weak October steel production data, the continued slide in coal markets, the more dovish RBA Governor’s speech to the ABE last week, European Covid cases/ lockdowns, rising tension on the Russia/ Ukraine border, weakness in EM currencies, plus the stronger US$”. In terms of specific levels, the bank states that “a test down to the 0.7170/ 0.7220 region remains the next objective while gains will be capped by the 0.7290/ 0.7310 region”.

Powell renomination prompts hawkish reaction

The hawkish kneejerk reaction (i.e. dollar strengthening) to the news of Powell’s renomination reflects an unwind of dovish bets on a Brainard nomination. Had Brainard been nominated to the position of Chairman, the expectation amongst market participants would have been that there would have been a greater tolerance for high inflation and a greater emphasis on patience and returning to pre-Covid-19 employment levels.

Now that he has secured the renomination, some analysts have facetiously joked that Powell might now turn more hawkish, as some other Fed members have judging by recent rhetoric. Whilst this was initially presented by some as a joke, the reaction in bond markets to Powell’s renomination suggests that market participants truly are now betting on some sort of hawkish shift at the Fed. 2-year US yields are now up more than 6bps on the day to fresh post-pandemic highs above 0.55%.