AUD/USD trades indecisively around 0.6400, US-Aussie data in focus
- AUD/USD flattens around 0.6400 as investors await key US-Australian economic data this week.
- The Fed is unlikely to adjust monetary policy if inflation expectations accelerate.
- Aussie Q1 CPI data will influence the RBA’s monetary policy outlook.
The AUD/USD pair recovers initial losses and turns flat around 0.6400 during European trading hours on Monday. The Aussie pair trades indecisively as investors await a slew of United States (US) economic and Australian Consumer Price Index (CPI) data, which will be released this week.
The US Dollar (USD) trades sideways at the start of the week, with the US Dollar index (DXY) wobbling around 99.60.
This week, investors will pay close attention to the US Personal Consumption Expenditure Price Index (PCE), Nonfarm Payrolls, and Gross Domestic Product (GDP) data, as they will significantly influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook. Investors will also focus on the US ISM Manufacturing and Services PMI data to know the impact of new tariff policies by US President Donald Trump on the input cost of business owners and eventually the increase in selling prices.
Fed policymakers would be reluctant to make monetary policy adjustments in the case of an increase in inflation expectations. They have been guiding a “wait and see” approach until gaining clarity on how new government policies will shape the economic outlook.
In the Aussie region, investors await the Q1 Consumer Price Index (CPI) data, which will be released on Wednesday. The Aussie CPI is expected to have grown by 2.2% compared to the same quarter of the previous year, slower than the 2.4% increase seen in the last quarter. Cooling inflationary pressures would boost expectations that the Reserve Bank of Australia (RBA) will cut interest rates in the May meeting.
Meanwhile, growing uncertainty over trade relations between the US and China will remain the major trigger for the pair. Given Australia’s high dependency on its exports to China, uncertainty is increasing over the latter’s economic prospects, impacting the Australian Dollar (AUD).
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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