Australian Dollar strengthens on RBA hawkish stance
- Australian Dollar regains ground lost in recent sessions, buoyed by RBA hawkish hold.
- Aussie might gain further ground as the RBA will probably be one of the last G10 central banks to cut interest rates.
- There won’t be any relevant economic highlights on Wednesday for Aussie.
In Wednesday's session, the Australian Dollar (AUD) continued to smile and trade with gains against its peers following the Reserve Bank of Australia’s (RBA) hawkish hold on Tuesday.
While traces of weakness persist in the Australian economy, continuing high inflation prompted the RBA to delay any prospective rate cuts. This move positions the RBA to be among the last G10 central banks to initiate rate cuts, a factor that could bring sustained gains for the Aussie. The next highlights will be in Friday’s sessions when Australia releases Judo PMI figures from June.
Daily digest market movers: AUD continues strong following RBA’s decision
- In accordance with anticipation, RBA held a restrained tone and maintained its official cash rate (OCR) at 4.35%, noting that "the Board is not ruling anything in or out."
- Governor Bullock further clarified the RBA's position during her press conference by confirming rate hike discussions and negating the consideration of rate cuts at this time.
- She emphasized the RBA's persisting concerns over inflation, suggesting a high threshold for policy easing.
- RBA maintained its observation that "inflation remains above target and is proving persistent", reiterating that "the Board expects that it will be some time yet before inflation is sustainably in the target range."
- Money market anticipates approximately 50 bps of easing by December 2025, with possibilities of rate hikes in August and September not being entirely dismissed.
- On the negative side for the Aussie, the slow momentum in the Chinese economy, particularly the persistent failure to regain strong traction post-pandemic, may pose additional challenges for the Australian currency.
Technical analysis: Bullish signals rebound but await confirmation
Technical indicators show signs of recovery with the Relative Strength Index (RSI) once again moving above 50, suggesting a potential change in momentum toward buying. The Moving Average Convergence Divergence (MACD) is illustrating a decline in red bars, which hints at an easing selling pressure.
However, for the signals to switch to buying, the AUD/USD pair needs to clear the 20-day Simple Moving Average (SMA). Until this hurdle is overcome, it cannot be seen as a confirmed buying signal.
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.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
