- AUD/USD continues to consolidate above 0.6520 after mixed cues from the US PCE inflation report for June.
- Annual headline PCE decelerated expectedly, the core measure grew steadily.
- The next move in the Australian Dollar will be influenced by the Aussie Q2 CPI data.
The AUD/USD pair remains steady above the immediate support of 0.6520 in Friday’s New York session after the release of the mixed United States (US) Personal Consumption Expenditure Inflation (PCE) report for June.
The Bureau of Economic Analysis (BEA) reported that annual headline PCE inflation decelerated expectedly to 2.5% from May’s reading of 2.6%. In the same period, the core PCE inflation, which is the Federal Reserve’s (Fed) preferred inflation gauge, grew steadily by 2.6% against expectations of 2.5%.
The month-on-month headline figure rose expectedly by 0.1% while the core inflation grew at a faster pace of 0.2%. Stickier core inflation figures could weigh on market expectations that the Fed will start reducing interest rates from the September meeting.
For more cues, investors will look for Fed’s monetary policy announcement on Wednesday in which the central bank is widely anticipated to leave interest rates unchanged in the range of 5.25%-5.50%.
Meanwhile, the Australian Dollar (AUD) has been facing an intense sell-off for more than a week as deepening worries over the global growth outlook have dampened iron ore prices. Australia caters to more than half of global iron-ore demand, and a sharp decline in its prices has raised concerns over foreign flows to the nation.
Global growth woes came after China posted weaker-than-expected Gross Domestic Product (GDP) in the second quarter of this year. Also, China’s Third Plenum lacked blockbuster liquidity measures to spurt consumption.
Going forward, the next trigger for the Australian Dollar will be the Q2 Consumer Price Index (CPI) data, which will provide cues as to whether the Reserve Bank of Australia (RBA) will hike interest rates further this year. In the first quarter, price pressures rose at a faster pace of 1.0% from 0.6% growth recorded in the last quarter of 2023.
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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