Australian Dollar sees further red and markets gear up for key labor data
|- AUD/USD further diminished on Wednesday, falling beneath 0.6730.
- Australian employment figures are set to guide short-term trends that could lay the groundwork for a more hawkish RBA.
- Fed’s Barkin didn’t rule out a July rate cut.
The Australian Dollar (AUD) extended losses against the USD during Wednesday's session, dipping to 0.6725. Following the declining streak from Monday's and Tuesday's sessions, the AUD intensified its losses as profit-taking by investors escalated. Nevertheless, the economic landscape suggests the AUD's potential to withstand falls against the USD amidst differing monetary policies between the Federal Reserve and the Reserve Bank of Australia (RBA).
Despite indications of a fluctuating Australian economy, persistently high inflation is urging the RBA to postpone cuts, which may restrain the AUD's downside. It is foreseen that the RBA will be amongst the final central banks from the G10 countries to implement rate cuts, a component that could bolster the AUD's upswing.
Daily digest market movers: AUD path dependant on labor market data
- Investors are poised on the Australian Employment data, scheduled for release on Thursday. The forecast reveals that 20,000 job hunters found employment in June, a number parallel to the May figures.
- If the unemployment rate remains stable at 4.0%, it would signal a robust labor market which could bolster expectations of the RBA's policy-tightening initiative.
- However, in the US, the market suspects a near-future rate cut by the Federal Reserve as data show signs of inflation easing.
- As for now, market projections currently factor in almost a 50% chance of the RBA increasing rates in September or November.
- On the other hand, the likelihood of a rate cut by the Federal Reserve in September is nearly to be priced in.
- The divergent monetary policies of the Fed and RBA might limit the losses of the pair.
Technical Analysis: AUD/USD enters a correction phase, overall outlook remains afloat
Despite the losses this week, the outlook of the AUD/USD remains overall positive, as the pair is maintaining levels not seen since the start of the year. After a surge of over 1.5% in July, indicators like the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) reached overbought territory which instigated a slight correction.
The aim for buyers is to hold steady within the 0.6700-0.6730 to keep the short-term outlook positive.
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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