- AUD/USD shows slight decrease since Monday but retains January highs near 0.6800.
- RBA's hawkish stance and potential rate hike add momentum to AUD.
- Australian labor data will dictate the short-term dynamics.
The Australian Dollar (AUD) experienced a mild correction against the USD in Monday's session, declining to 0.6760. After a four-day winning streak, the AUD adjusted its gains albeit the underlying fundamental factors hint at a possible continuation in the upward trend.
The Reserve Bank of Australia (RBA) despite several signs of economic weakness in the Australian economy, is viewed to be among the last G10 nations' central banks to initiate rate cuts due to stubbornly high inflation; a factor that might limit AUD's downside and extend its gains.
Daily market movers: AUD may gain as labor data may justify the RBA’s hawkish stance
- On the economic data front, both the markets and investors are focusing on the Australian Employment data for June, which is due for publication on Thursday.
- The report is expected to show that 20K job-seekers were hired against 39.7K onboarded in May.
- The unemployment rate will be on the look and if it remains steady at 4.0%, it would indicate a strong labor market, hence, fuelling expectations of further policy-tightening by the Reserve Bank of Australia (RBA).
- According to recent market speculations, there is nearly a 50% chance of a rate hike in either September or November on the RBA's side.
- On the other hand, the market sees 80% odds of a September cut by the Federal Reserve, dependent of course on the incoming data. Key speeches by Powell on Monday, and other officials this week will provide more clarity.
Technical Analysis: AUD/USD sustains highs, overbought indicators hint at looming correction
Despite the mild correction on Monday, the AUD/USD maintains a bullish stance, retaining the heights seen since January. Parallelly, the pair climbed by more than 1.5% in July, suggesting a strong upward move. However, the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicate nearing overbought territory and some exhaustion, suggesting a possible correction is on the horizon.
Buyers' target remains to maintain the 0.6760-0.6780 range and possibly surpass the 0.6800 area. Conversely, the 0.6730, 0.6700, and 0.6650 levels are set as the support ranges in case of a correction.
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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