AUD/USD: US Dollar Loses Ground as Market Sentiment Improves

The Australian dollar is presumed to receive a lift today as the German Constitutional Court cleared the way for the European Stability Mechanism while the markets continue to expect the Federal Reserve to unveil further measures to stimulate the US economy as it convenes its two-day policy meeting. Meanwhile, economic indicators out of Australia suggest improving conditions ahead.

In a highly anticipated decision, the German high court approved the retification of the ESM, the Euro Zone’s permanent bailout fund, and the fiscal pact on states’ budget limits. The decision comes with a minor caveat – that any increase in German financial exposure should have parliamentary approval. Nevertheless, the ruling is widely considered as a key to the Euro bloc’s ability to support struggling member states by providing the region with a firewall against financial contagion. The ESM was supposed to come into effect in July as a firewall to stop the crisis from spreading, but with the approval of Germany, whose share is more than one quarter of the fund, the ESM could become operational in October as planned. With efforts to contain the crisis clearing a vital hurdle and set to continue, market sentiment is deemed to incline.

Meanwhile, investors are also eagerly eyeing another key event as the US central bank’s Federal Open Market Committee convenes to discuss monetary policy. The Fed is widely expected to extend the scope of its low interest rate pledge until 2015 from its current objective of late 2014. However, the committee’s decision on whether a large-scale asset purchase program or QE3 would be launched, will likely garner most attention. In its last meeting, the Fed said additional stimulus would be warranted unless a substantial and sustainable firming of the economy emerges. Since then, Fed Chairman Ben Bernanke expressed grave concern about unemployment and defended the Fed’s previous asset purchases at a Jackson Hole speech. Meanwhile, the August jobs report continued to underscore the weakness of the US economy. As such, more analysts are expecting the Fed to unveil a third round of bond purchases tomorrow, likely weighing further on the Greenback.

Across the Pacific, the Australian economy received a boost as the consumer confidence and housing reports yielded encouraging results. The Westpac Consumer Sentiment report for September suggested that moods among Australians brightened amid rising optimism on personal finances and on the economic outlook. Meanwhile, Housing Starts rose 4.6 percent in the second quarter, a promising sign for the housing sector. As such, a long position is recommended for the AUD/USD today.

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