Australian Dollar rises as higher inflation dampens the odds of RBA’s rate cuts
|- The Australian Dollar appreciates as higher consumer inflation diminishes the possibility of RBA’s rate cuts.
- Australia’s monthly CPI jumped by 4.0% YoY against the expected growth of 3.8% in May.
- The US Dollar remains calm as investors turn cautious ahead of key US economic data releases later this week.
The Australian Dollar (AUD) gains ground after releasing May's higher-than-expected Monthly Consumer Price Index (CPI). The persistently high inflation is a roadblock to the Reserve Bank of Australia's (RBA) possible rate cuts, potentially supporting the Aussie Dollar and underpinning the AUD/USD pair.
Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent stated on Wednesday that recent data emphasize the necessity of remaining vigilant about potential inflation increases. Kent noted that current policies are contributing to slower demand growth and lower inflation. He also mentioned that no options regarding future interest rate adjustments are being excluded, per Bloomberg.
The US Dollar remains calm after posting gains on Tuesday. Investors turn cautious ahead of key US economic data releases later this week. The revised US Gross Domestic Product (GDP) for the first quarter (Q1) is scheduled to be released on Thursday, followed by the Personal Consumption Expenditures (PCE) Price Index on Friday.
Daily Digest Market Movers: Australian Dollar edges higher due to higher consumer inflation
- Australia’s monthly Consumer Price Index (CPI) jumped by 4.0% in the year to May, up from the 3.6% increase recorded in April, according to data published by the Australian Bureau of Statistics (ABS) on Wednesday. This increase exceeded the market forecast, which predicted a 3.8% growth for the reported period.
- Reuters cited Fed Governor Michelle Bowman repeating her view on Tuesday that holding the policy rate steady for some time will likely be enough to bring inflation under control. Meanwhile, Fed Governor Lisa Cook said it would be appropriate to cut interest rates "at some point" given significant progress on inflation and a gradual cooling of the labor market, though remained vague about the timing of the easing.
- According to Bloomberg, China Premier Li Qiang expressed confidence in China's ability to achieve its full-year growth target of around 5%. On Tuesday, the People's Bank of China injected 300 billion yuan through seven-day reverse repos, keeping the reverse repo rate at 1.8%. Changes in the Chinese economy could significantly impact the Australian market, given the close trade relationship between China and Australia.
- Australia's Westpac Consumer Confidence rose by 1.7% month-over-month in June, rebounding from a 0.3% decline the previous month. This marks the first increase in four months and the highest level since February.
- On Friday, the US Composite PMI for June surpassed expectations, rising to 54.6 from May’s reading of 54.5. This figure marked the highest level since April 2022. The Manufacturing PMI increased to a reading of 51.7 from a 51.3 figure, exceeding the forecast of 51.0. Similarly, the Services PMI rose to 55.1 from 54.8 in May, beating the consensus estimate of 53.7.
- The RBA Governor Michele Bullock said during her latest press conference that the Board discussed potential rate hikes, dismissing considerations of rate cuts in the near term, as per ABC News. Markets have significantly reduced their expectations for a RBA’s rate cut this year, with an easing not anticipated until April next year.
Technical Analysis: Australian Dollar holds a position around 0.6650
The Australian Dollar trades around 0.6660 on Wednesday. Analysis of the daily chart shows a neutral bias for the AUD/USD pair as it consolidates within a rectangle formation. The 14-day Relative Strength Index (RSI) is positioned slightly above the 50 level. Further movement may indicate a clear directional trend.
The AUD/USD pair may find support around the 50-day Exponential Moving Average (EMA) at 0.6616. A break below this level could lead the pair to test the lower boundary of the rectangle formation near 0.6585.
On the upside, the AUD/USD pair may encounter resistance near the upper boundary of the rectangle formation around 0.6695, aligned with the psychological level of 0.6700. Beyond that, potential resistance levels include the high of 0.6714 observed since January.
AUD/USD: Daily Chart
Australian Dollar price today
The table below shows the percentage change of the Australian Dollar (AUD) against listed major currencies today. The Australian Dollar was the strongest against the Japanese Yen.
| USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
| USD | 0.00% | -0.01% | -0.03% | -0.59% | 0.06% | 0.01% | -0.02% | |
| EUR | 0.00% | 0.00% | -0.04% | -0.58% | 0.08% | 0.03% | -0.02% | |
| GBP | 0.02% | 0.03% | -0.02% | -0.56% | 0.10% | 0.04% | 0.00% | |
| CAD | 0.03% | 0.04% | 0.02% | -0.55% | 0.12% | 0.07% | 0.01% | |
| AUD | 0.59% | 0.58% | 0.54% | 0.53% | 0.65% | 0.61% | 0.60% | |
| JPY | -0.06% | -0.07% | -0.10% | -0.11% | -0.63% | -0.05% | -0.10% | |
| NZD | -0.02% | -0.03% | -0.06% | -0.07% | -0.61% | 0.02% | -0.05% | |
| CHF | 0.02% | 0.02% | 0.00% | -0.02% | -0.58% | 0.10% | 0.05% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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