- Aussie remains weak after CPI data from Australia.
- The Fed held rates steady as expected and Powell gave clear clues on the next steps.
- Divergences between the RBA and Fed might bail out the Aussie.
The Aussie continued to underperform against the USD on Wednesday as markets digested mixed inflation data from Australia but managed to clear daily losses after the Federal Reserve (Fed) decision. A slightly softer outlook from China continues to fuel concerns about the Australian economy. However, the Reserve Bank of Australia's (RBA) reluctance to introduce rate cuts due to high inflation could provide a safety net for the Aussie.
The continued high inflation pressure on the Australian economy is leading the RBA to hold off on rate cuts. Predictions suggest that the RBA will be among the last of the G10 countries to initiate a rate cut, a move that could limit further downside pressure on the Aussie.
Daily digest market movers: Aussie weakness remains after CPI data from Australia, markets digests Powell's words
- The prevalent 'risk-off' sentiment continues due to worries about a slowdown in the Chinese economy, significantly impacting Australia's economic stance. Attention is now focusing on the June and Q2 Consumer Price Index (CPI) figures released on Wednesday.
- The Australian Bureau of Statistics (ABS) reports that Australia's Q2 headline CPI saw an increase of 1.0% QoQ, with an acceleration to 3.8% YoY from the previous 3.6%. At the same time, June's headline CPI is projected to have fallen to 3.8% YoY.
- Considering the inflation rate considerably exceeds the 2-3% target range, the RBA is expected to remain patient with its policy changes. This cautious approach means that the swaps market predicts the first 25 bps cut coming only next summer.
- The session's highlight was the Federal Reserve (Fed) decision followed by Jerome Powell's words.
- The Federal Reserve has maintained the federal funds rate at 5.25% to 5.5%, noting moderate job gains and a slight rise in unemployment but that inflation is still elevated.
- Jerome Powell during the press conference noted that the bank requires additional data to embrace cuts but that if figures continue to show progress, the bank is ready to respond.
- Markets reacted positively, with increases in gold and stocks and a weaker US Dollar; jobless claims and nonfarm payrolls will be crucial for future decisions and markets bets.
AUD/USD technical analysis: Bearish position, bullish traction is not enough to trigger a reaction
The AUD/USD's sustained trade below the 20, 100 and 200-day Simple Moving Average (SMA) confirms an overall bearish outlook. Despite indicator readings remaining firmly in negative territory, the oversold condition might prompt a correction. However, weak bullish momentum could lead to a period of sideways trading unless a major fundamental development occurs.
The key support levels have been adjusted to 0.6530 and 0.6500, with resistance levels at 0.6600 (200-day SMA), 0.6610 and 0.6630.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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