The AUD/USD and NZD/USD currency pairs are shifting away from their historical reliance on Chinese economic signals, becoming increasingly sensitive to interest rate differentials. As the Federal Reserve prepares to release updated economic projections next week, traders are bracing for a potentially hawkish tone that could reinforce the U.S. dollar’s dominance and deepen the struggles of the Australian and New Zealand dollars.

Rate Differentials in Focus

Recent trading patterns highlight a departure from traditional China-driven narratives. Both AUD/USD and NZD/USD are now showing stronger correlations with yield differentials between the U.S. and China rather than with commodities or other China-related economic proxies. For the Australian dollar, domestic bullish data and promises of policy support from China failed to offset bearish momentum, as evidenced by a notable reversal on Thursday.

Similarly, the New Zealand dollar is exhibiting weak correlations with China-related proxies, underlining its increasing sensitivity to global rate dynamics.

Fed’s Projections: A Key Market Catalyst

The upcoming Federal Open Market Committee (FOMC) meeting will be pivotal for both pairs. Traders expect updated economic and rate projections to influence U.S. Treasury yields, particularly in the longer durations, which have been driving recent currency movements.

Federal Reserve Chair Jerome Powell’s recent remarks on persistent inflation and diminishing downside risks to the labor market suggest a hawkish “cut” is on the horizon. A 25 basis point rate cut next week is widely anticipated, but attention is focused on the Fed’s revised outlook for 2025 and beyond. Analysts speculate that the Fed may signal fewer rate cuts for next year and raise its estimate for the neutral rate from the previous 2.9% to potentially above 3%.

Implications for AUD/USD and NZD/USD

• AUD/USD: The pair remains under bearish pressure, trading in a falling wedge pattern. Key support levels dating back to October 2022 are under threat, and momentum indicators suggest further downside is likely. A break below Wednesday’s lows at .6350 could open the path to .6270.
• NZD/USD: The Kiwi faces an even steeper decline, with technical indicators pointing to a potential breakdown below November 2023 lows. Should the pair extend its decline, support around .5600 may become a target for bears.

Market Sentiment and Strategy

As traders position for a hawkish adjustment to the Fed funds outlook, U.S. Treasury yields continue to climb, strengthening the dollar against both the Aussie and Kiwi. The short-term trend for both pairs remains bearish, with rallies providing potential opportunities for sellers.

Looking ahead, the Fed’s revised projections will be critical in determining the trajectory of these currencies. A more aggressive stance from the central bank could further amplify bearish sentiment, while a dovish surprise may offer a temporary reprieve for the Antipodean pairs. For now, the focus remains squarely on rate differentials as the dominant driver of price action.