Australian Dollar soars ahead of Fed meeting
- AUD/USD soars due to a less hawkish Fed and a more hawkish RBA stance.
- Fed rate cut talks depreciate the US Dollar due to increased odds of 50 bps cut in Wednesday’s meeting.
- Lower US yields also weigh on the US Dollar.
The Australian economy faces a complex outlook amid rising inflation and a cautious central bank. Despite initial expectations of interest rate cuts, the Reserve Bank of Australia's hawkish stance has prompted markets to anticipate only a modest 25 bps reduction in 2024.
Daily digest market movers: Australian Dollar rises sharply on Fed rate cut uncertainty and RBA's hawkish stance
- The Australian Dollar gained on Monday, influenced by the RBA's hawkish stance and uncertainty surrounding the Fed's interest rate decision on Wednesday.
- With inflation remaining elevated, RBA Governor Michele Bullock emphasized the need for caution and indicated that rate cuts remain premature.
- Due to uncertainty over the magnitude of the Fed's rate cut at its Wednesday meeting, US Treasury yields fell, exerting downward pressure on the US Dollar.
- The CME FedWatch Tool indicates a 40% probability of a 25 bps rate cut and a near 60% chance of a 50 bps reduction.
AUD/USD technical outlook: Bulls must take the 20-day SMA to confirm a recovery
The AUD/USD pair has been trading with a mixed outlook in the past sessions. The Relative Strength Index (RSI) is at 55, suggesting that buying pressure is rising. The Moving Average Convergence Divergence (MACD) red bars are decreasing, suggesting that selling pressure is declining but steady. A consolidation above the 20-day Simple Moving Average (SMA) at 0.6735 could be considered a buying signal, which would confirm a bullish outlook for the short-term.
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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