The Australian Dollar (AUD) edges lower against the US Dollar (USD) on Monday, after data from ratings agency S&P Global shows Purchasing Managers in key sectors, especially manufacturing, hold a more optimistic outlook in the US than in Australia.
The Aussie is also weighed down by concerns regarding the impact of high interest rates on its rate-sensitive house market and China growth woes, whilst better-than-expected Aussie employment data is a counter-balancing positive.
The AUD/USD pair trades in the 0.67s as the US session gets underway.
AUD/USD is in a sideways trend on both the long and medium-term charts. The February 2023 high at 0.7158 is a key hurdle on the weekly chart, which if vaulted, will alter the outlook to one that is more bullishly biased.
Likewise, the 0.6458 low established in June is a key level for bears, which if breached decisively, would give the chart a more bearish overtone.
Australian Dollar vs US Dollar: Weekly Chart
A confluence of support made up of all the major daily simple moving averages (50, 100 and 200) exists in the upper 0.66s and early 0.67s. This is expected to provide a rigid cordon of support that will make it difficult for bears to push the exchange rate much lower from its level at the time of writing.
Australian Dollar vs US Dollar: Daily Chart
Only a decisive break below the 50 and 100-day Simple Moving Averages (SMA) would confirm a continuation of the recent bear move lower to a speculative target at the June and July lows in the mid-0.64s.
A decisive break lower could consist in a long red daily candlestick, which pierces cleanly below the support levels identified and then closes near to the low of the day, or three red down days in a row that break below the support confluence, with the final day closing near its low and a decent distance below the lowest MA.
There exists the potential for a recovery from the current level, given the underpinning support from the three MAs, however, so far there are no signs of a reversal. Such a sign might come in the form of a candlestick reversal pattern or bullish convergence with the Relative Strength Indicator (RSI) – yet given their absence, it is too early to call a bullish turnaround.
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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