- USD recovered after signs of sticky inflation on July's PCE.
- Recovery momentum in AUD throughout August has been supported mainly by the weak USD and improved conditions of risk-related assets.
- RBA's hawkish stance continues to benefit the Aussie.
The AUD/USD declined by 0.70% to 0.6750 in Friday's session as the USD strengthened in response to July's Personal Consumption Expenditures (PCE) figures. Despite this, the Reserve Bank of Australia's (RBA) hawkish stance may limit further declines in the AUD.
Despite a complex economic outlook for Australia, the RBA has taken a rigid stance in response to persistent inflation. As a result, financial markets now anticipate a modest 25-basis-point reduction in interest rates by 2024.
Daily digest market movers: Australian Dollar takes a breather, fundamentals still favor further upside
- RBA maintains OCR at 4.35%, signaling a cautious approach and ongoing inflation concerns.
- Governor Bullock emphasizes RBA's readiness to hike rates further if necessary.
- Copper and iron ore price gains also contributed to AUD upside momentum.
- US PCE inflation data showed core inflation rising 2.6%, slower than estimated and indicating a sticky underlying inflation.
- Divergence between Federal Reserve (Fed) and RBA might limit the pair's downside.
AUD/USD technical outlook: Bearish momentum appears, pair loses 0.6800
The Relative Strength Index (RSI) is currently at 58, pointing down, indicating that selling pressure is increasing. The Moving Average Convergence Divergence (MACD) is showing flat green bars, suggesting that the bullish traction is running out of gas.
However, it all points to buyers taking a breather after August's furious rally, which saw indicators near overbought terrain.
Key support levels to watch are 0.6750 and 0.6730, while resistance levels to consider are 0.6800 (previous support) and 0.6830.
RBA FAQs
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.
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.
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.
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.
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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