- AUD/USD slips amid ongoing bearish sentiment, approaching key support level.
- Economic weakness in Australia intensifies rate-cut expectations for the RBA.
- Technical indicators suggest a potential correction, but bearish momentum remains dominant.
The Australian Dollar (AUD) encountered some selling pressure against the US Dollar (USD) on Monday, declining by 0.50% to 0.6480. During the European session, it fell to its lowest since November 2023 around 0.6350 as risk-off flows dominated the markets, while investors await Tuesday's Reserve Bank of Australia (RBA) decision for further direction.
Despite persistent high inflation, recent data has pointed to weaknesses in the Australian economy. This has prompted markets to shift their expectations from a potential rate hike by the RBA to a rate cut by year-end. The RBA is expected to keep rates steady at 4.35% at its meeting on Tuesday, but investors will be closely monitoring the central bank's policy guidance for any hints of a more dovish stance.
Daily digest market movers: Aussie down as markets digest PMIs ahead of RBA
- Australia's July services and composite PMIs were weaker than expected, with the composite reading falling below 50 for the first time since January.
- The Melbourne Institute Monthly Inflation Gauge showed a decline in inflation to within the RBA's target band.
- The RBA is expected to maintain a neutral policy stance despite inflation remaining above its target range.
- The highlight will be that the RBA will publish new sets of forecasts in its Statement on Monetary Policy, which will guide markets on the next interest rate bets.
AUD/USD technical analysis: Bears continue in command, correction still possible
The AUD/USD pair continues to trade beneath its key Simple Moving Averages (20, 100 and 200-day SMAs), indicating a prevailing bearish sentiment. The Relative Strength Index (RSI) also suggests bearishness, with values hovering between 30-37 in recent sessions. The Moving Average Convergence Divergence (MACD) maintains red bars, further reinforcing the negative momentum.
However, the AUD/USD pair has found some support near the 0.6480 and 0.6350 levels, which could potentially act as a temporary floor. Resistance is anticipated around the 0.6560-0.6570 zone, where selling pressure has previously capped rallies.
Central banks FAQs
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%.
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.
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%.
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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