Australian Dollar rises after US CPI, RBA signals
- Australian Dollar is rising against the US Dollar after the latest US inflation data showed a decline in the CPI.
- RBA’s Hunter spoke about Australia's labor market, highlighting that it is still tight relative to full employment.
- As the RBA remains hawkish, the AUD/USD pair’s upside is open.
The AUD/USD rose by 0.25% to 0.6670 on Wednesday as markets reacted to the release of US inflation data and comments from the Reserve Bank of Australia (RBA). The US Consumer Price Index (CPI) showed a decline in the annual rate of price increases, raising hopes that the Federal Reserve (Fed) may slow the pace of interest rate hikes.
In the face of a complex economic outlook, the Reserve Bank of Australia's (RBA) aggressive stance against high inflation has tempered market expectations. With inflation remaining elevated, investors now anticipate a more gradual easing of monetary policy, forecasting only a 0.25% interest rate reduction by 2024.
Daily digest market movers: Australian Dollar gains on US CPI figures and RBA signals
- RBA Assistant Governor Sarah Hunter's comments supported the RBA's case against near-term policy rate cuts, which boosted the AUD. Hunter commented that the labor market is still tight relative to full employment, which reiterated the bank’s hawkish stance.
- On the US side, CPI declined to 2.5% YoY, below the consensus estimate of 2.7% and the previous reading of 2.9%.
- Core CPI, which excludes volatile food and energy prices, rose 3.2% YoY, matching the market expectation and July's increase.
- On a monthly basis, the CPI increased 0.2%, while the core CPI rose above consensus to 0.3%.
- Money market futures traders have slashed the odds for a 50 bps rate cut by the Fed to 15% and increased the probability of a 25 bps cut to 85%.
- Despite its hawkish stance, the RBA is likely to join the global easing cycle later this year due to weak underlying economic activity and lower inflation pressure.
- If the Fed and RBA policies align, the Aussie may see further downside.
AUD/USD technical outlook: Pair faces a mixed outlook while indicators recover
The pair is trading in a mixed outlook, according to the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD) and price action. The RSI is rising sharply, this implies that buying pressure is recovering while it still remains in negative terrain. The MACD is decreasing and red. This generally suggests that selling pressure is losing strength.
The pair is facing some resistance at 0.6700. A break above this level could lead to further gains toward 0.6740. On the downside, support can be found at 0.6660 and 0.6620. A break below these levels could see the pair falling toward 0.6600.
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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