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- Australian Dollar continues gaining, investors look for clues in Powell’s words
Australian Dollar continues gaining, investors look for clues in Powell’s words
- 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.
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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