Australian Dollar Price Forecast: AUD defends its gains as markets continue digesting RBA's hold

AUD extends gains after RBA’s hawkish hold.
Governor Bullock affirmed no immediate need for rate cuts.
Investors digest Trade Balance data from China.

The AUD/USD pair is currently trading around 0.6555, up by 0.50% on Wednesday. The Australian Dollar continues to gain strength from the Reserve Bank of Australia (RBA) holding rates steady on Tuesday. Governor Bullock maintained that there is no pressing need to cut rates, securing the Australian Dollar's position.

Due to the mixed Australian economic outlook and the RBA’s hawkish stance, markets are now pricing just 25 bps of easing in 2024.

Daily digest market movers: AUD holds firm following RBA's decision

The Reserve Bank of Australia decisively held rates at 4.35%, reinforcing that "the Board is not ruling anything in or out.” The RBA also underlined the need for vigilance toward upside risks to inflation.
The updated macro forecasts anticipate longer-lasting inflation, with trimmed mean and headline CPI inflation predicted to hit the midpoint of the 2-3% band by December 2026 as opposed to the June 2026 estimate from the May forecasts. Markets have reacted swiftly, now pricing in only 25 bps of easing by year-end.
Governor Bullock clarified that "the Board did consider a rate rise" and that rate cuts are "not on the agenda in the near term." She added that expectations for rate cuts are "a little ahead of themselves."
On the data front, China's July Trade Balance, in terms of Chinese Yuan, was CNY601.98 billion, down from June's CNY703.77 billion. The country’s imports rebounded by 6.6% YoY in July from -0.6% recorded in June, while exports rose by 6.5% YoY vs. 10.7% seen in June.
It's important to note that China is an important trade partner from Australia, and the Aussie is sensitive to Chinese data.

AUD/USD technical analysis: Bulls step in as selling pressure decelerates

The AUD/USD pair has been bearish over the past sessions, but bears seem to be taking a breather. The most immediate support and resistance seem to be around the 0.6480 and 0.6570 levels, respectively.

The Relative Strength Index (RSI) is hovering around the neutral area of the scale after hitting oversold terrain in the last sessions. However, the general decrease in value suggests a downtrend. Similarly, the Moving Average Convergence Divergence (MACD) indicator presents a series of diminishing red bars, indicating diminishing, but bearish momentum lining up with the bearish price action on the chart.

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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