Australian Dollar shows mild gains on reduced USD strength

Australian Dollar records modest gains due to waning USD strength.
Australian Q2 GDP meets expectations but relies heavily on government spending.
US job openings decrease, indicating potential labor market easing, which weighs on USD.

The AUD/USD saw mild gains on Wednesday, rising to 0.6720 amid reduced USD strength. This move followed the release of Australian Q2 GDP data, which met expectations but highlighted the economy's reliance on government spending and subdued private domestic demand. This weakness supports the case for the Reserve Bank of Australia (RBA) to ease monetary policy in the near term. Michelle Bullocks will speak on Thursday.

Given the uncertain economic outlook in Australia and the Reserve Bank of Australia's (RBA) aggressive stance on monetary policy due to persistent inflation, financial markets anticipate only a 0.25% reduction in interest rates in 2024.

Daily digest market movers: Australian Dollar rises on weak US jobs data, eyes on Bullock statements

On the local front, Australia's Q2 GDP growth met expectations at 0.2% QoQ, but the YoY rate exceeded forecasts at 1.0%.
Government spending boosted GDP growth by 0.3%, while private sector activity subtracted 0.1%.
Net exports added 0.1% to growth, while inventory destocking reduced it by 0.3%.
Weak private demand reinforced expectations for RBA easing later this year, but the best-case scenario is that the bank will only cut 25 bps in 2024.
US job openings fell to 7.67 million in July, below expectations of 8.1 million.
US decline in job openings suggests a cooling labor market, potentially adding pressure on the Federal Reserve to cut rates.
Next Fed steps will likely be determined by Friday's Nonfarm Payrolls figures from August.

AUD/USD technical outlook: Bullish exhaustion seen, indicators weaken

The AUD/USD pair rose mildly in Wednesday’s trading session, jumping from the lows of 0.6680s recorded on Tuesday and approaching the 0.6740 zone.

The Relative Strength Index (RSI) retreated from overbought conditions, suggesting potential exhaustion in upward momentum. Also, the Moving Average Convergence Divergence (MACD) printed a red bar, indicating mounting selling pressure.

Volume has been decreasing in the last two trading sessions, which could be related to profit-taking. If the AUD/USD loses 0.6700, 0.6680 and 0.6660 would be the next support levels to watch. On the other hand, if it breaks above 0.6760, 0.6800 and 0.6820 are the next resistance levels to consider.

Australian Dollar FAQs

What key factors drive the Australian Dollar?

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.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

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.

How does the health of the Chinese Economy impact the Australian Dollar?

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.

How does the price of Iron Ore impact the Australian Dollar?

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.

How does the Trade Balance impact the Australian Dollar?

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.

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