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- Australian Dollar soars following soft US inflation figures as Powell comes to podium
Australian Dollar soars following soft US inflation figures as Powell comes to podium
- AUD/USD surges as soft US inflation figures buoy the Australian Dollar.
- Attention is now on Fed's decision later in the session.
- Australian traders are digesting the inflation figures from China released during the Asian session.
On Tuesday, the Australian Dollar (AUD) gained against the US Dollar (USD), countering the prior bearish pressure, and is now lingering around the 0.6705 area. This uptrend is likely induced by the release of soft inflation figures from the US. The announcement of the Federal Reserve (Fed) meeting, at 18:00 GMT, is expected to trigger volatility.
On the Australian front, soft inflation data from China, a vital trading partner, is currently being evaluated by Australian traders. The Chinese inflation figures could influence the monetary policy of the Reserve Bank of Australia (RBA) and the performance of the Australian dollar as economic weakness in China might prompt sooner rate cuts.
Daily digest market movers: Australian Dollar is gaining strength as traders digest US CPI data
- On the US side, markets were met with somewhat softer May Consumer Price Index (CPI) data on Tuesday.
- CPI dropped to 3.3% annually in May, falling short of the market's 3.4% expectation.
- Core CPI also saw a dip, while the overall CPI remained stable on a monthly basis.
- Two-day Fed meeting concludes on Wednesday. Given that most inflation measures have remained higher than desired since their last meeting, it's highly unlikely that there will be any shift in Fed's tone.
- On the Chinese side, China's May Consumer Price Index (CPI) was slightly lower than expected, while its Producer Price Index (PPI) was higher than anticipated.
- As Chinese economy grapples with deflationary risks that could steer their monetary policy to remain loose, which might be followed by the RBA.
Technical analysis: AUD/USD bulls gain momentum, outlook looks bright
The Relative Strength Index (RSI) has ascended above the 50 level, which supports the bullish sentiment, while the Moving Average Convergence Divergence (MACD) presents shrinking red bars that reflect diminishing selling pressure.
The overall positive outlook remains intact as the pair continues to stay above the 100 and 200-day Simple Moving Averages (SMA) around 0.6550. This position above these key levels suggests an overall favorable trend. Furthermore, the bulls took over the 20-day SMA on Wednesday, leading to a brightened short-term 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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