Australian Dollar extends decline as traders brace for US CPI data
- The Australian Dollar remains under selling pressure in Thursday’s Asian session.
- The firmer USD and lack of further China’s stimulus measures drag the pair lower.
- The US CPI inflation data will be in the spotlight on Thursday.
The Australian Dollar (AUD) extends its decline on Thursday. The stronger US Dollar (USD) amid rising speculation of a 25 basis points (bps) rate cut by the Federal Reserve (Fed) in November undermines the Aussie. Furthermore, Beijing's attempt to stimulate the world’s second-largest economy disappointed investors as China’s top economic planning authority failed to announce additional measures to improve flagging growth. It’s worth noting that China is a major trading partner to Australia, and concerns about China's sluggish economy tend to have a negative impact on the AUD value.
Investors will closely monitor the key US Consumer Price Index (CPI) inflation data, which is due later on Thursday. The headline US CPI is expected to show an increase of 2.3% YoY in September, while the core CPI inflation is estimated to show a rise of 3.2% YoY in the same report period. However, in case the report shows a softer-than-expected outcome, this could open the door for a jumbo Fed rate cut, which might weigh on the USD and cap the downside for AUD/USD.
Daily Digest Market Movers: Australian Dollar softens ahead of US CPI data
- RBA Minutes from the September meeting showed board members overlooked the warning that there would be no rate cuts in the near future. The Australian central bank wants to keep its options open, watching whether the economy starts to pick up in the second half of the year.
- “This leaves the door open to a shift to neutral by the end of this year and then easing in early 2025. We continue to expect the first cash rate cut in February 2025,” noted ANZ analysts.
- The World Bank forecasted that China’s growth rate will slow to 4.3% in 2025, down from a projected 4.8% this year, in an economic update on Tuesday.
- San Francisco Fed President Mary Daly said on Wednesday one or two more rate cuts this year are likely if the economy evolves as she expects, adding that she is now "quite confident" inflation is headed toward the Fed's 2% target.
- Boston Fed President Susan Collins said on Wednesday that with inflation trends growing weaker, it is very probable that the Fed can deliver more interest rate reductions.
- The markets have priced in nearly 80% odds of 25 basis points (bps) Fed rate cuts in November, up from 31.1% last week, according to the CME FedWatch Tool.
Technical Analysis: Australian Dollar remains vulnerable near the key support level
The Australian Dollar weakens on the day. Technically, the bullish outlook of the AUD/USD pair looks vulnerable as the pair hovers around the lower limit of the ascending trend channel and the key 100-day Exponential Moving Average (EMA) on the daily chart. If AUD/USD crosses below the mentioned levels, this could resume its downside. The downward momentum is reinforced by the 14-day Relative Strength Index (RSI) which is located below the midline near 41.20.
The crucial support level for AUD/USD emerges at 0.6700, representing the lower limit of the trend channel, the 100-day EMA and the psychological level. A breach of this level could pave the way to 0.6622, the low of September 11.
On the other hand, the high of September 6 at 0.6767 acts as an immediate resistance level of the pair. Further north, the next upside barrier is seen at 0.6823, the high of August 29, followed by 0.6942, the high of September 30.
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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