AUD/USD edges lower as US Dollar gains ground ahead of US key data

AUD/USD edges lower to 0.6900 as the US Dollar gains firm footing.
The US Dollar bounces back as traders brace for a slew of US data.
Fed Powell pushed back large rate cut expectations for November.

The AUD/USD pair exhibits a subdued performance near the crucial support of 0.6900 in Tuesday’s European session. The Aussie asset faces slight selling pressure as the US Dollar (USD) bounces back strongly after the Federal Reserve (Fed) Chair Jerome Powell pushed back market speculation for another interest rate cut of 50 basis points (bps) in November.

The CME FedWatch tool shows that the probability of the Fed reducing interest rates by 50 basis points (bps) to 4.25%-4.50% in November has eased to 39% from 58% a week ago.

S&P 500 futures have posted some losses in the European session, portraying a cautious market mood. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rises sharply to near 101.00. However, 10-year US Treasury yields tumble to near 3.75%.

Fed Powell commented on Monday at the National Association for Business Economics conference that policymakers don’t feel for cutting interest rates quickly. In the latest Fed dot plot, officials forecasted the Federal Fund Rate heading to 4.4% by the year-end, indicating that there will be two quarter-to-a-percentage rate cuts in each of the two meetings remaining this year.

On the economic front, investors will focus on the United States (US) JOLTS Job Openings data for August and the ISM Manufacturing PMI for September, which will be published at 14:00 GMT.

Meanwhile, the near-term appeal of the Australian Dollar (AUD) remains firm as Australia’s economic outlook has been improved by China’s massive liquidity stimulus. China's cabinet reported on Sunday that it will focus on solving outstanding economic problems and strive to complete annual economic and social development goals, Reuters reported. Being a proxy for China’s economic growth, the Australian Dollar has benefitted from the stimulus announcement.

Australian Dollar FAQs

What key factors drive the Australian Dollar?

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.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

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.

How does the health of the Chinese Economy impact the Australian Dollar?

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.

How does the price of Iron Ore impact the Australian Dollar?

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.

How does the Trade Balance impact the Australian Dollar?

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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