Australian Dollar continues weakening ahead of key data

AUD/USD further diminished on Wednesday, falling beneath 0.6730.
Australian employment figures are set to guide short-term trends that could lay the groundwork for a more hawkish RBA.
Fed’s Barkin didn’t rule out a July rate cut.

The Australian Dollar (AUD) extended losses against the USD during Wednesday's session, dipping to 0.6725. Following the declining streak from Monday's and Tuesday's sessions, the AUD intensified its losses as profit-taking by investors escalated. Nevertheless, the economic landscape suggests the AUD's potential to withstand falls against the USD amidst differing monetary policies between the Federal Reserve and the Reserve Bank of Australia (RBA).

Despite indications of a fluctuating Australian economy, persistently high inflation is urging the RBA to postpone cuts, which may restrain the AUD's downside. It is foreseen that the RBA will be amongst the final central banks from the G10 countries to implement rate cuts, a component that could bolster the AUD's upswing.

Daily digest market movers: AUD path dependant on labor market data

Investors are poised on the Australian Employment data, scheduled for release on Thursday. The forecast reveals that 20,000 job hunters found employment in June, a number parallel to the May figures.
If the unemployment rate remains stable at 4.0%, it would signal a robust labor market which could bolster expectations of the RBA's policy-tightening initiative.
However, in the US, the market suspects a near-future rate cut by the Federal Reserve as data show signs of inflation easing.
As for now, market projections currently factor in almost a 50% chance of the RBA increasing rates in September or November.
On the other hand, the likelihood of a rate cut by the Federal Reserve in September is nearly to be priced in.
The divergent monetary policies of the Fed and RBA might limit the losses of the pair.

Technical Analysis: AUD/USD enters a correction phase, overall outlook remains afloat

Despite the losses this week, the outlook of the AUD/USD remains overall positive, as the pair is maintaining levels not seen since the start of the year. After a surge of over 1.5% in July, indicators like the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) reached overbought territory which instigated a slight correction.

The aim for buyers is to hold steady within the 0.6700-0.6730 to keep the short-term outlook positive.

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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