Australian Dollar closes the week with losses on weak PMIs

Australian Dollar has suffered extended declines in recent sessions as RBA gains slowly fade.
PMI figures from Australia reveal weaker-than-expected data.
Fragility in the Australian economy seems to be driving demand off the Aussie.

In Friday's session, the Australian Dollar (AUD) intensified its losses against its peers. The AUD/USD duo has been testing its notable support at the 0.6640 threshold, the 20-day Simple Moving Average (SMA). Selling pressure emerged from the Asian markets in light of soft June preliminary PMIs from Judo Bank in Australia. This weakness has been compounded by high US Treasury yields and optimistic PMI data from S&P in the US, lifting the USD.

Notwithstanding certain signs of frailty in Australia’s economic scene, the stubbornly high inflation continues to prompt the Reserve Bank of Australia (RBA) to delay potential rate cuts, potentially offsetting the Aussie's losses. The RBA is primed to be among the last G10 nation central banks to initiate rate cuts, which might perpetuate the Aussie's gains.

Daily digest market movers: Australian Dollar grapples with weakened data, awaits further cues

Australia reported weaker preliminary data from the June Purchasing Managers Index (PMI) set, with Manufacturing at 47.5 versus May's 49.7, Services at 51.0 against 52.5, and the Composite rate falling for a third consecutive month to 50.6, from 52.1 in May.
In contrast, US business activity in the private sector continued to showcase solid growth, with the S&P Global Composite PMI improving slightly to 54.6.
Governor Bullock, during her latest press conference, confirmed that the Board discussed potential rate hikes, dismissing considerations of rate cuts in the near term.
Bullock maintained, “Inflation remains above target and is proving persistent,” specifying that "the Board expects that it will be some time yet before inflation is sustainably in the target range."
RBA affirmed its readiness to do "what is necessary" to guide inflation back within target parameters.
Market anticipates nearly 50 bps of easing by December 2025, while rate hikes in August and September are yet to be ruled out on the RBA’s side.
Fed signals only one cut in 2024, while markets continue to hope for a September cut.

Technical analysis: Signs of bullish strength waning, bears time now

The technical front reveals weakened momentum, with the Relative Strength Index (RSI) remaining above 50 but tilting downwards and the Moving Average Convergence Divergence (MACD) continuing to chart red bars. For further confirmation of a more solid buying stance, the AUD/USD pair needs to firmly support itself beyond the 20-day Simple Moving Average (SMA). Sellers might extend trials of the mentioned SMA support in ensuing sessions to test its resilience.

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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