Australian Dollar dips on renewed US Dollar strength
|- AUD/USD falls as the USD regains strength.
- RBA holds rates steady but remains hawkish, citing inflation risks.
- The Fed's neutral outlook suggests caution regarding future rate cuts.
The AUD/USD pair declined by 1.25% to 0.6600 on Friday, continuing its downtrend. The renewed strength of the US Dollar weighs on the pair despite improved risk sentiment. However, the hawkish stance of the Reserve Bank of Australia (RBA) and expectations of additional Chinese stimulus could support the Aussie.
The AUD/USD pair experienced volatility amid the recent US presidential election and RBA's monetary policy stance. Trump's election victory initially triggered a decline in the Aussie, but the RBA's hawkish stance stabilized the currency. The RBA's emphasis on restrictive interest rates and positive signs from China have provided support.
Daily digest market movers: Australian Dollar declines amid renewed US Dollar strength after FOMC meeting
- The Fed acknowledged economic expansion but noted easing labor market conditions and elevated inflation, maintaining a neutral outlook.
- Powell stated that the central bank will continue reducing its balance sheet and follow a data-dependent policy-making approach.
- Earlier in the week, the AUD/USD pair rose after the RBA left interest rates unchanged but signaled a hawkish stance, emphasizing the need for restrictive policy to combat inflationary pressure.
- RBA Governor Michelle Bullock reiterated the necessity of maintaining steady interest rates until the economy moderates more than anticipated.
- As the RBA doesn’t fully embrace cuts, the downside for the AUD/USD might be limited. However, the economic strength on the US is a thing to follow as it might continue pushing the pair down.
AUD/USD technical outlook: AUD/USD turns bearish after failing to capitalize on SMA convergence
The Relative Strength Index (RSI) is at 46, in negative territory, and declining sharply. The Moving Average Convergence Divergence (MACD) is flat and red, suggesting that selling pressure is flat. The overall outlook for the AUD/USD is bearish.
The AUD/USD pair's failure to surmount the convergence of the 200 and 20-day Simple Moving Averages (SMAs) at approximately 0.6630 signaled a resumption of its downtrend. This technical development led to a decline toward the 0.6600 support level, indicating further bearish momentum. The inability to break above the key resistance at 0.6630 suggests that the pair may continue its downward trajectory in the near term.
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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