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- Australian Dollar faces losses, markets await key inflation data
Australian Dollar faces losses, markets await key inflation data
- Australian Dollar’s downside is supported by hawkish RBA outlook.
- Markets now hint at rate cuts not before February 2025.
- Upcoming May CPI figures will be pivotal for markets to anticipate next RBA moves.
Tuesday's session observed a decline in the Australian Dollar (AUD) as it slipped down to the 0.6650 mark against the US Dollar, edging close to the 20-day Simple Moving Average (SMA) at 0.6640. The upcoming Australian inflation data remains in the spotlight, expected to shape future RBA moves. Low-tier data reported during the Asian sessions didn't significantly affect the Aussie's standing.
In Australia, despite signs of an ailing economy, the persistently high inflation acts as a roadblock to the Reserve Bank of Australia's (RBA) possible rate cuts, potentially limiting the downside pressure on the Aussie.
Daily digest market movers: Aussie sees red ahead of CPI figures
- In June, the Westpac Melbourne Institute Consumer Confidence index in Australia saw an increase of 1.7%, reaching 83.6 compared to 82.2 in May and marked the first rise since February.
- Despite this uptick, consumer sentiment remains significantly pessimistic, with the index still far below the neutral level of 100.
- Markets are poised for Wednesday's release of the May Consumer Price Index (CPI) data, anticipating potential changes to guide the RBA's forthcoming decisions.
- Swaps market has reset its odds to less than a 25% chance of a rate cut by December 2024, rising to around 65% probability by February 2025, indicating the RBA's steadfast approach to tackling inflation.
- Last week, Governor Bullock introduced a new stance, affirming the RBA "will do what is necessary" to bring inflation back to target. Consequently, with the RBA ruling out rate cuts, the downside on the Aussie is set to remain constrained.
Technical analysis: AUD/USD faces pullback, buyers aim to guard 20-day SMA
From a technical standpoint, adjustments in the indicators are noted. The Relative Strength Index (RSI) continues to stay above 50 but indicates a downtrend.
Similarly, the Moving Average Convergence Divergence (MACD) persists in the negative sphere with a sequence of red bars. Upcoming sessions are contingent on the buyers upholding the AUD/USD above the 20-day Simple Moving Average (SMA), a line of defense with the potential to set a promising momentum for the pair's future outlook.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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