- Australian Dollar slides lower on CPI release.
- RBA has stated last week that rate cuts are not on the table.
- Markets are confident of a single 25 bps cut by year's end.
The Australian Dollar retreated against its US counterpart following the release of Australia's latest inflation data. The soft inflation data has reinforced expectations that the Reserve Bank of Australia (RBA) will cut interest rates later this year. A slowdown in household spending further suggests that the economic cycle in Australia may be easing.
Amidst a complex economic landscape in Australia, the RBA is concerned over persistent inflation and have prompted a cautious approach. With the soft figures released on Wednesday, the markets now anticipate a modest 25 basis point rate reduction in 2024.
Daily digest market movers: Australian Dollar declines on CPI data
- Australia's July Consumer Price Index (CPI) came in at 3.5% YoY, slightly higher than expected but still within the RBA's target range.
- Trimmed mean inflation fell to 3.8% y/y, its lowest level since January.
- The RBA has indicated that it is unlikely to cut interest rates in the near term, but the market continues to expect a 25 bp cut by year-end.
- If the RBA signals a hawkish approach, the downside for the Aussie is limited.
AUD/USD Technical Outlook: Pair sees slight decline, key levels in play
The AUD/USD pair experienced a slight decline on Wednesday, as buyers continued to lock in profits from last week’s rally. The Relative Strength Index (RSI) fell to 60, indicating a lean towards a neutral market sentiment. The Moving Average Convergence Divergence (MACD) shows flat green bars, suggesting a lack of momentum.
After last week’s gains, the pair has been consolidating within a range of 0.6750-0.6820, and a break above these levels might set the pace of the pair in the next sessions.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
GBP/USD climbs back closer to 1.3100, upside seems limited ahead of UK data/US CPI
GBP/USD attracts some buyers on Wednesday amid a modest USD decline. The fundamental backdrop warrants before placing aggressive bullish bets. Traders might also prefer to wait for the release of the crucial US CPI report.
EUR/USD trades around 1.1050 after halting a three-day losing streak, US CPI eyed
EUR/USD breaks its three-day losing streak, trading around 1.1050 during Wednesday’s Asian session. The upside of the pair is attributed to the subdued US Dollar ahead of the US Consumer Price Index data scheduled to be released later in the North American hours.
Gold buyers try their luck again heading into US inflation showdown
Gold price is consolidating a two-day uptrend above $2,500 in Wednesday’s Asian trading. Gold buyers take a breather, with the next directional move likely triggered by the critical US Consumer Price Index data due later this Wednesday.
Bitcoin breaks above $56,000 resistance level
Bitcoin price approaches a critical support level; if it holds, it might pave the way for further recovery. However, Ethereum and Ripple find rejection around their resistance level and could be poised for declines, diverging from BTC’s potential rebound.
Five Fundamentals for the week: Jittery markets fear the ECB, US inflation and more Premium
Is there still a chance? Investors hope for a 50-bps rate cut from the Fed but also fear a global recession is underway. The world's three largest economies, the US, China, and the eurozone, are set to rock global markets.
Moneta Markets review 2024: All you need to know
VERIFIED In this review, the FXStreet team provides an independent and thorough analysis based on direct testing and real experiences with Moneta Markets – an excellent broker for novice to intermediate forex traders who want to broaden their knowledge base.