AUD/USD slumps to near 0.6330 as USD rebounds ahead of Fed’s policy
- AUD/USD corrects further to near 0.6330 as the US Dollar bounces back ahead of the Fed’s monetary policy decision and dot plot.
- The Fed is almost certain to keep interest rates steady for the second straight monetary policy meeting.
- The Australian economy is expected to have added fresh 30K workers in February.
The AUD/USD pair extends its correction to near 0.6330 in the North American session on Wednesday from the three-week high of 0.6390 posted on Monday. The Aussie pair faces selling pressure as the US Dollar (USD) rebounds ahead of the Federal Reserve’s (Fed) monetary policy decision at 18:00 GMT.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, recovers to near 103.70 after attracting bids near the five-month low of 103.20. S&P 500 futures have posted nominal gains ahead of the opening of the United States (US), indicating a slight improvement in the risk appetite of investors.
Investors expect the Fed to leave interest rates unchanged in the range of 4.25%-4.50% for the second time in a row. Fed officials have been guiding that borrowing rates should remain at their current levels until they get clarity over the policies by US President Donald Trump. Market participants expect Trump’s tariff policies will be inflationary for the economy and could lead to a recession.
Apart from the Fed’s policy decision, investors will also focus on the doty plot, which shows where officials see the Federal funds rate heading in the medium and longer term. In the December meeting, Fed officials forecasted two interest rate cuts for 2025.
Meanwhile, the Australian Dollar (AUD) will be influenced by the Aussie employment data for February, which will be released on Thursday. Investors will pay close attention to the labor market data as it will influence market expectations for the Reserve Bank of Australia’s (RBA) monetary policy outlook. The employment report is expected to show that the economy added 30K fresh workers last month, lower than 44K in January. The Unemployment Rate is expected to remain steady at 4.1%.
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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