Australian Dollar holds ground as RBA leaves the door open for a hike
|- AUD/USD continues sideways trading around 20-day SMA.
- Fed Minutes on Wednesday follow RBA’s turn.
- May’s Retail Sales from Australia and US ADP figures are also due on Wednesday.
- Powell showed confidence in inflation coming back down to 2% sooner than expected.
Tuesday's session witnessed the Australian Dollar (AUD) clearing losses against the US Dollar following the release of the hawkish Reserve Bank of Australia (RBA) minutes and the US JOLTs figures from May. For the USD, the confidence of Jerome Powell on inflation coming back down sooner on the prospects of a cooling labor market weakened the Greenback.
The Australian economy exhibits some signs of weakness. Nevertheless, the persistently high inflation is prompting the RBA to delay potential rate cuts. The RBA is set to be among the last G10 countries' central banks to start reducing rates, which may limit the downside of the Aussie.
Daily digest market movers: Aussie clears losses as market assesses latest RBA minutes
- RBA Minutes from June meeting offered more details on bank’s hold stance. One of the main reasons that the RBA members saw a stronger case to leave the policy rate unchanged rather than a hike was because of the “uncertainty around the data for consumption and clear evidence that many households were experiencing financial stress.”
- On Wednesday, sales figures for May in Australia will be reported. The expectation is for a 0.3% MoM rise compared with 0.1% in April and its outcome will be key.
- Markets predict a 25% chance of a 25-basis-point rate increase at the next August 6 meeting from the RBA.
- In the US, JOLT Job Openings came in above 8 million in May.
- In addition, Jerome Powell was on the wires and admitted some progress on inflation and that the rate may reach 2% the next year.
- As for now, the market sees 70% odds of a Federal Reserve rate cut in September but will heavily depend on the upcoming data.
Technical analysis: AUD/USD sways above the 20-day SMA
From a technical perspective, the AUD/USD has continued a trend of sideways trading since mid-May. The 20-day Simple Moving Average (SMA) at 0.6640 provides strong support, with further support found at levels 0.6620 and 0.6600. The critical resistance levels are currently set at 0.6660, 0.6690 and 0.6700. This supports a continuation of the established 0.6600-0.6700 range.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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