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- The Australian dollar rose against the US dollar due to lower inflation in the United States and a possible dovish stance from the Federal Reserve.
- Soft US PCE data could help reinforce the divergence in Australian policy between the RBA and the Fed.
- A delay in interest rate cuts by the Reserve Bank of Australia could support the Australian dollar, in contrast to the easing strategies pursued by other G10 central banks.
Friday’s session saw a significant rise in the Australian dollar (AUD) against the US dollar following an unexpected drop in US inflation in May. As a result, expectations of a possible dovish stance from the Reserve Bank of Australia have been reduced. Federal Reserve (Fed) grew, leading to a potential policy divergence with the Reserve Bank of Australia (RBA).
The Australian economy is showing slight signs of weakness. However, inflation is rising Rates Maintaining stubborn flexibility, and preventing the RBA from implementing potential interest rate cuts. Reserve Bank of Australia The Reserve Bank of Australia is expected to delay cutting interest rates, making it one of the last G10 central banks to adopt a policy of cutting interest rates. A delay in cutting rates could strengthen the Australian dollar.
Daily Market Movers Summary: Aussie Dollar Continues to Strengthen Amid Strong CPI Figures
- In terms of available data, the Australian dollar was boosted by growing expectations that the Reserve Bank of Australia will raise interest rates again after the hot CPI data released earlier in the week.
- Market indicators now point to a 40% chance of a 25 basis point rate hike by the RBA on September 24, extending to 50% by November 5.
- US inflation fell to 2.6% year-on-year in May from 2.7% in April, according to the US Bureau of Economic Analysis. This decline was in line with market expectations.
- On a monthly basis, the PCE price index remained flat. The core PCE price index rose 2.6%, down from the 2.8% increase recorded in April.
- As a result, this downward trend toward the Fed’s 2.0% target has raised the probability of a Fed rate cut in September to 66%, compared to 64% before the personal spending data was released, according to the CME FedWatch tool.
Technical Analysis: AUD/USD maintains buying interest above the 20-day simple moving average
Technically ProspectsIndicators showed signs of recovery with the Relative Strength Index (RSI) remaining above 50 and the Moving Average Convergence Divergence (MACD) charting a new green bar. Defending the 20-day simple moving average (SMA) at 0.6640 will be crucial for the pair’s momentum going forward. As long as buyers can stay above this key level, the future outlook looks promising.
It is worth noting that the pair managed to rise again above the 20-day simple moving average on Friday, after falling to a low of 0.6620, which is a key indicator that buyer defenses are still strong.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages Australia’s monetary policy. Decisions are made by the Board of Governors at 11 annual meetings and ad hoc emergency meetings as needed. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2% to 3%, but also to “contribute to a stable currency, full employment, economic prosperity and the well-being of the Australian people”. The main tool for achieving this is to raise or lower interest rates. Relatively high interest rates will strengthen the Australian dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation has always been thought to be a negative factor for currencies because it reduces the value of money overall, the opposite is the case in modern times with the easing of cross-border capital controls. Moderately high inflation now tends to prompt central banks to raise interest rates, which in turn attracts more capital flows from global investors looking for a profitable place to keep 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 have an impact on the value of its currency. Investors prefer to invest their capital in safe, growing economies rather than unstable, 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 (QT) is the opposite of quantitative easing. It is implemented after quantitative easing when the economic recovery is underway and inflation starts to rise. While in QE the Reserve Bank of Australia (RBA) buys government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets and stops reinvesting the principal due on the bonds it already holds. It will be positive (or bullish) for the Australian dollar.
