Australian Dollar rises as soft US CPI data fuels dovish bets on the Fed

AUD continued its upswing on Thursday against USD.
Markets adjust their stance on the Federal Reserve following US inflation figures.
RBA's reluctance to initiate rate cuts due to stubbornly high inflation provides stable support for Aussie.

The Australian Dollar (AUD) carried on with its positive trend against the USD on Thursday, rising to 0.6780 after hitting a high of 0.6798. Despite an empty Australian financial calendar this week with no significant events, the pair still holds its ground with the AUD resuming its recent gains. Market participants are adjusting their bets on the next moves from the Federal Reserve (Fed) following the release of US inflation data.

The Reserve Bank of Australia (RBA) is gearing to be among the last G10 nations' central banks to initiate rate cuts, a factor that may extend the AUD's gains. High inflation within Australia is prompting the RBA to postpone rate cuts, which may limit the downside for the AUD.

Daily market movers: AUD holds as markets adjust to US inflation figures

US inflation, measured by the annual change in the Consumer Price Index (CPI), fell to 3% in June from 3.3% in May, as reported by the US Bureau of Labor Statistics (BLS) on Wednesday, lower than expected.
Core measure also came in below the market's forecast at 3.3% YoY.
This validates the market's prediction of an earlier cut in September, and as RBA and Fed policies diverge, the upside for the pair is open-ended.
Fed Chair Jerome Powell on Thursday kept a cautious tone on inflation during his testimony before the House Financial Services Committee. He reaffirmed that while inflation does not need to fall below the 2% mark to begin rate cuts, Fed still lacks firm confidence to lower rates soon.
While RBA considers a hike and the market braces for a Fed cut, Aussie might see additional gains.

Technical analysis: AUD/USD’s rising streak continues, consolidation anticipated

The AUD/USD remains on a bullish path, resulting in the pair making gains on Thursday. The outlook remains positive, with indicators including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) staying strong in deeply positive territory. While consolidation is possible, the pair may have some room left to continue rising before correcting.

The support levels to monitor in case of a pullback are 0.6670, 0.6650 and 0.6630 in case of a correction. The 0.6760-0.6780 range is the aspirational target for buyers, with the region beyond 0.6800 also in sight.

RBA FAQs

What is the Reserve Bank of Australia and how does it influence the Australian Dollar?

The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.

How does inflation data impact the value of the Australian Dollar?

While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.

How does economic data influence the value of the Australian Dollar?

Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.

What is Quantitative Easing (QE) and how does it affect the Australian Dollar?

Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.

What is Quantitative tightening (QT) and how does it affect the Australian Dollar?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.

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