Australian Dollar plunges after RBA decision, US CPI looms
|- AUD/USD declines by 0.82% to 0.6395 on Tuesday.
- The RBA's less hawkish interest rate guidance weighs heavily on the Aussie.
- Michele Bullock, RBA Governor, remains slightly confident that inflation will return to the bank’s 2% target.
The AUD/USD pair fell sharply below 0.6400 on Tuesday, declining by 0.82% to 0.6395 after the Reserve Bank of Australia (RBA) delivered less hawkish interest rate guidance. RBA Governor Michele Bullock expressed confidence that inflation risks had eased but not disappeared. She noted that the decision to cut interest rates in the upcoming February meeting would be data-dependent, but she was confident that wages and demand were slowing.
Investors are now waiting for US inflation data and Australian employment data, both of which could influence the Aussie’s direction in the coming days. Meanwhile, the market remains under selling pressure as expectations grow for a less dovish RBA. Analysts at ANZ and Westpac predict that the RBA could start reducing interest rates by May 2025.
Daily digest market movers: Aussie down as markets assess less hawkish RBA tone
- The Aussie remains under severe selling pressure as markets bet on a less dovish RBA stance.
- Michele Bullock, RBA Governor, expressed slight confidence in inflation returning to the bank’s target of 2%.
- When asked about whether the RBA will cut interest rates in February, Bullock said the decision would be data-dependent with a focus on slowing wages and demand.
- Before the RBA’s policy decision, analysts at ANZ and Westpac predicted that the RBA may begin reducing interest rates beginning in May 2025.
- This week, investors should brace for more volatility in the Australian Dollar, as the domestic employment data for November is scheduled to be released on Thursday.
- Meanwhile, the US Dollar rises ahead of the November US Consumer Price Index data, which will be released on Wednesday.
- This data will likely influence market speculation regarding the Federal Reserve’s interest rate decisions for the December 18 policy meeting.
- As for now according to the CME FedWatch tool, the likelihood of the Fed reducing interest rates by 25 basis points to 4.25%-4.50% is currently around 80%.
AUD/USD technical outlook: Bulls take a punch, bears take the lead
The Relative Strength Index (RSI) sits at 36 for the Aussie pair, still in the negative area and declining sharply, signaling ongoing selling pressure. The Moving Average Convergence Divergence (MACD) histogram also prints decreasing green bars, suggesting that the bearish momentum is likely to persist.
Immediate support is found at the recent low of 0.6350, while resistance lies near 0.6440. The market will remain volatile, and upcoming data releases, such as the RBA's policy decision and US CPI, could provide significant direction for the pair in the coming days.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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