Australian Dollar saw red on Tuesday as markets gear up for CPI

Australian Dollar’s downside is supported by hawkish RBA outlook.
Markets now hint at rate cuts not before February 2025.
Upcoming May CPI figures will be pivotal for markets to anticipate next RBA moves.

Tuesday's session observed a decline in the Australian Dollar (AUD) as it slipped down to the 0.6650 mark against the US Dollar, edging close to the 20-day Simple Moving Average (SMA) at 0.6640. The upcoming Australian inflation data remains in the spotlight, expected to shape future RBA moves. Low-tier data reported during the Asian sessions didn't significantly affect the Aussie's standing.

In Australia, despite signs of an ailing economy, the persistently high inflation acts as a roadblock to the Reserve Bank of Australia's (RBA) possible rate cuts, potentially limiting the downside pressure on the Aussie.

Daily digest market movers: Aussie sees red ahead of CPI figures

In June, the Westpac Melbourne Institute Consumer Confidence index in Australia saw an increase of 1.7%, reaching 83.6 compared to 82.2 in May and marked the first rise since February.
Despite this uptick, consumer sentiment remains significantly pessimistic, with the index still far below the neutral level of 100.
Markets are poised for Wednesday's release of the May Consumer Price Index (CPI) data, anticipating potential changes to guide the RBA's forthcoming decisions.
Swaps market has reset its odds to less than a 25% chance of a rate cut by December 2024, rising to around 65% probability by February 2025, indicating the RBA's steadfast approach to tackling inflation.
Last week, Governor Bullock introduced a new stance, affirming the RBA "will do what is necessary" to bring inflation back to target. Consequently, with the RBA ruling out rate cuts, the downside on the Aussie is set to remain constrained.

Technical analysis: AUD/USD faces pullback, buyers aim to guard 20-day SMA

From a technical standpoint, adjustments in the indicators are noted. The Relative Strength Index (RSI) continues to stay above 50 but indicates a downtrend.

Similarly, the Moving Average Convergence Divergence (MACD) persists in the negative sphere with a sequence of red bars. Upcoming sessions are contingent on the buyers upholding the AUD/USD above the 20-day Simple Moving Average (SMA), a line of defense with the potential to set a promising momentum for the pair's future outlook.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

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