Australian Dollar continues gaining, investors adjust to US Inflation figures

Australian Dollar continues gaining, investors adjust to US Inflation figures

  • AUD continued its upswing on Thursday against USD.
  • Markets adjust their stance on the Federal Reserve following US inflation figures.
  • RBA’s reluctance to initiate rate cuts due to stubbornly high inflation provides stable support for Aussie.

The Australian Dollar (AUD) carried on with its positive trend against the USD on Thursday, rising to 0.6780 after hitting a high of 0.6798. Despite an empty Australian financial calendar this week with no significant events, the pair still holds its ground with the AUD resuming its recent gains. Market participants are adjusting their bets on the next moves from the Federal Reserve (Fed) following the release of US inflation data.

The Reserve Bank of Australia (RBA) is gearing to be among the last G10 nations’ central banks to initiate rate cuts, a factor that may extend the AUD’s gains. High inflation within Australia is prompting the RBA to postpone rate cuts, which may limit the downside for the AUD.

Daily market movers: AUD holds as markets adjust to US inflation figures

  • US inflation, measured by the annual change in the Consumer Price Index (CPI), fell to 3% in June from 3.3% in May, as reported by the US Bureau of Labor Statistics (BLS) on Wednesday, lower than expected.
  • Core measure also came in below the market’s forecast at 3.3% YoY.
  • This validates the market’s prediction of an earlier cut in September, and as RBA and Fed policies diverge, the upside for the pair is open-ended.
  • Fed Chair Jerome Powell on Thursday kept a cautious tone on inflation during his testimony before the House Financial Services Committee. He reaffirmed that while inflation does not need to fall below the 2% mark to begin rate cuts, Fed still lacks firm confidence to lower rates soon.
  • While RBA considers a hike and the market braces for a Fed cut, Aussie might see additional gains.

Technical analysis: AUD/USD’s rising streak continues, consolidation anticipated

The AUD/USD remains on a bullish path, resulting in the pair making gains on Thursday. The outlook remains positive, with indicators including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) staying strong in deeply positive territory. While consolidation is possible, the pair may have some room left to continue rising before correcting.

The support levels to monitor in case of a pullback are 0.6670, 0.6650 and 0.6630 in case of a correction. The 0.6760-0.6780 range is the aspirational target for buyers, with the region beyond 0.6800 also in sight.

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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