- AUD made mild gains on Wednesday against the USD.
- Markets are still deciphering Jerome Powell’s cautious stance, which limits traction for USD.
- RBA’s hawkish stance provides stable support for Aussie.
The Australian Dollar (AUD) continued its positive trend against the USD on Wednesday, mildly rising near 0.6750. Despite no significant pertinent events down the line for the Australian financial scene this week, the pair still maintains its stronghold, with the AUD continuing its recent gains. On the US side, markets await clues on the Federal Reserve’s (Fed) plans.
The Reserve Bank of Australia (RBA) is set to be among the last G10 nations’ central banks to initiate rate cuts, a factor that boosts the AUD.
Updated daily market movers: AUD holds ground after Powell’s words
- Jerome Powell on Wednesday emphasized the need to pay elevated attention to the labor market, citing that it has significantly deteriorated.
- In addition, he expressed a degree of confidence regarding the downward movement of inflation.
- He stated that achieving price stability without hurting employment is achievable but didn’t provide a specific inflation or unemployment figure as a benchmark for deciding on rate cuts.
- US CPI figures, coming on Thursday, will be crucial. The headline is projected to decrease slightly to 3.1% YoY, while the core is anticipated to remain steady at 3.4% YoY.
- On the RBA’s side, markets bet on nearly a 50% chance of a hike in September or November. On the Fed’s side, investors are confident in an 80% likelihood of a cut in September.
Technical analysis: AUD/USD’s gains continue, consolidation expected
The AUD/USD continues on a rising trajectory, resulting in the pair making gains on Wednesday. The outlook remains positive with indicators including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) holding strong in deep positive territory.
Following the pair’s performance hitting its highest since January, the trend hints at an optimistic outlook. However, traders appear to be keeping an eye on consolidating these gains, which is limiting the upside.
Support levels to monitor are at 0.6670, 0.6650 and 0.6630 in case of a correction.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering 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 had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases 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 maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.