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- The AUD/USD pair rose on Friday after Powell’s remarks at the Jackson Hole Symposium.
- Powell hinted that the Fed is ready to cut interest rates.
- On the other hand, the Reserve Bank of Australia is comfortable with restrictive interest rates, which is good for the Australian dollar.
australian dollar/us dollar The pound rose more than 1% to 0.6790 in Friday’s session, and settled at 0.6725. The upward move comes as the US dollar weakened after Federal Reserve Federal Reserve Chairman Jerome Powell’s remarks at the Jackson Hole Symposium.
Despite mixed economic signals from Australia, the Reserve Bank of Australia’s dovish stance on rising inflation continues to support the Australian dollar.
Daily Market Movers Summary: Aussie Gains Strength on Monetary Policy Divergences
- The Australian dollar got support from the latest Reserve Bank of Australia meeting minutes, which revealed no desire to ease monetary policy anytime soon.
- The Reserve Bank of Australia expects inflation to remain above its 2-3% target until the end of 2025, suggesting interest rates could remain high for a long time.
- Governor Bullock recently stated that the bank does not plan to cut interest rates in the near term.
- China’s recent moves to support the housing market are not expected to have a major impact due to underlying debt issues, but they are providing some additional support to the Australian dollar, given the close economic ties between Australia and China.
Technical Analysis: AUD/USD is gaining momentum, may consolidate
Shortly after consolidation, the AUD/USD pair rose to its highest level since January at 0.6790. The Relative Strength Index (RSI) is around 67, indicating that the pair is approaching the overbought threshold. Meanwhile, the Moving Average Convergence Divergence (MACD) indicator is showing rising green bars, indicating that bullish momentum is building.
Volume has remained high over the past few sessions, reflecting strong buyer interest. Resistance levels to watch include 0.6800 and 0.6850, while support levels are at 0.6700 and 0.6650.
Frequently Asked Questions about the Reserve Bank of Australia
The Reserve Bank of Australia sets interest rates and manages Australia’s monetary policy. Decisions are made by the Board of Governors at 11 annual meetings and special emergency meetings as needed. The RBA’s primary mandate is to maintain price stability, meaning inflation of 2-3%, but also “contributing to currency stability, full employment, economic prosperity and the well-being of the Australian people”. Its main tool for achieving this is to raise or lower interest rates. Relatively high interest rates will strengthen the Australian dollar and vice versa. The RBA’s other tools include quantitative easing and tightening.
While inflation has traditionally been seen as a negative factor for currencies because it generally reduces the value of money, the opposite has been the case in modern times with the relaxation of cross-border capital controls. Moderately high inflation now tends to prompt central banks to raise interest rates, which in turn attracts more capital inflows from global investors looking for a profitable place to park their money. This increases demand for the local currency, which in Australia’s case is the Australian dollar.
Macroeconomic data measures the health of an economy and can influence the value of its currency. Investors prefer to invest their capital in safe, growing economies rather than fragile, shrinking ones. Greater capital inflows boost aggregate demand and the value of the local currency. Classic indicators such as GDP, manufacturing and services PMIs, employment and consumer sentiment surveys can influence the Australian dollar. A strong economy may encourage the Reserve Bank of Australia to raise interest rates, which also supports the Australian dollar.
Quantitative easing is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit into the economy. Quantitative easing is the process by which the Reserve Bank of Australia prints the Australian dollar in order to buy assets – usually government or corporate bonds – from financial institutions, thus providing them with much-needed liquidity. Quantitative easing usually weakens the Australian dollar.
Quantitative tightening is the opposite of quantitative easing. It is implemented after quantitative easing when the economic recovery is underway and inflation is starting to rise. While in quantitative easing the RBA buys government and corporate bonds from financial institutions to provide them with liquidity, in quantitative tightening the RBA stops buying more assets and stops reinvesting the principal due on the bonds it already holds. This would be positive (or bullish) for the Australian dollar.
