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- The AUD/USD pair retreated slightly, settling near the 0.6575 level on Friday.
- The Reserve Bank of Australia reiterated its hawkish stance, which helped the Australian dollar rise.
- Investors digest Chinese inflation rate reported during European session.
The AUD/USD pair saw a slight pullback at 0.6575 during the Friday session, a modest 0.30% decline. However, hawkish rhetoric from the Reserve Bank of Australia and stronger Chinese inflation figures could limit the Aussie’s downside.
Given the complex Australian economic outlook and the RBA’s hawkish bias due to high inflation, markets are consistently pricing in only 25bp of easing in 2024.
Daily Market Movers Summary: RBA hawkish tone, strong Chinese inflation data could benefit AUD
- The Reserve Bank of Australia left interest rates unchanged, saying that “the Board does not rule out any possibility.” It is worth noting that the bank stressed the importance of remaining alert to potential inflation risks, which means not rushing to reverse policies.
- On Thursday, Reserve Bank of Australia Governor Michelle Bullock reiterated the need to cut interest rates, striking a hawkish tone and stressing that the bank “will not hesitate to raise interest rates if necessary” to challenge sustained inflation.
- On the data front, the National Bureau of Statistics said, confirming Friday’s inflation report, that consumer prices in China rose 0.5% in July on an annual basis, compared with expectations for a 0.3% rise.
- Additional details revealed that the core consumer price index rose 0.5% in July, the highest level since February, easing concerns about a deep economic slowdown in China.
- In this sense, although the good news is coming from Australia, the downside for the Australian dollar is limited.
Technical Outlook for AUD/USD: The pair is facing strong resistance at the convergence of the simple moving average around 0.6000
The price action of the AUD/USD pair over the past week reflects that bulls are facing significant resistance around the 0.6600 level, which coincides with the convergence of the 20100 and 200-day simple moving averages (SMA). However, support has remained consistently strong at the 0.6500 level.
The Relative Strength Index (RSI) has been stagnant around neutral territory, with values hovering around 49, indicating no significant buying or selling pressure. The significant rise from around 30 to 49 this week suggests that buyers have taken a step towards increasing attractiveness.
Frequently Asked Questions About Inflation
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a monthly and yearly basis. Core inflation excludes more volatile items such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the target level for central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index measures the change in the prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a monthly and yearly basis. The core CPI is the number that central banks target because it excludes volatile food and fuel inputs. When the core CPI rises above 2%, it usually leads to higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually leads to a stronger currency. The opposite is true when inflation falls.
Although this may seem counterintuitive, a country’s high inflation rate increases the value of its currency, and the opposite is true when inflation rates fall. This is because the central bank typically raises interest rates to combat high inflation, which attracts more global capital flows from investors looking for a profitable place to park their money.
Gold has historically been the go-to asset for investors during times of high inflation because it maintains its value. While investors often buy gold as a safe haven during times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will raise interest rates to combat it. Higher interest rates are negative for gold because they increase the opportunity cost of holding gold versus interest-bearing assets or putting money in a cash deposit account. Conversely, lower inflation tends to be positive for gold because it lowers interest rates, making the shiny metal a more viable investment alternative.
