- AUD/USD retreats to 0.6900 as the US Dollar gains firm ground.
- US Dollar bounces as traders prepare for US data set
- Fed’s Powell pushed back expectations of a big rate cut for November.
The AUD/USD pair exhibits a moderate performance near the crucial support of 0.6900 in the European session on Tuesday. The Australian asset faces slight selling pressure as the US Dollar (USD) rebounds strongly after Federal Reserve (Fed) Chair Jerome Powell delayed market speculation on another 50 basis point interest rate cut (pb) in November.
The CME FedWatch tool shows that the probability that the Fed will cut interest rates by 50 basis points (bps) to 4.25%-4.50% in November has decreased to 39% from 58% a week ago.
S&P 500 futures have posted some losses in the European session, portraying cautious market sentiment. The US Dollar Index (DXY), which tracks the value of the Dollar against six major currencies, rises sharply near 101.00. However, 10-year US Treasury yields fall to around 3.75%.
The Fed’s Powell commented Monday at the National Association of Business Economics conference that policymakers don’t feel the need to cut interest rates quickly. In the latest Fed dot chart, officials forecast that the federal funds rate will head to 4.4% by the end of the year, indicating there will be two quarter-percentage point cuts in each of the two remaining meetings this year.
On the economic front, investors will focus on the United States (US) JOLTS job openings data for August and the ISM Manufacturing PMI for September, due at 14:00 GMT.
Meanwhile, the short-term appeal of the Australian Dollar (AUD) remains firm as Australia’s economic outlook has improved thanks to massive liquidity stimulus from China. China’s cabinet said Sunday it will focus on resolving outstanding economic issues and strive to meet annual economic and social development goals, Reuters reported. Being a proxy for China’s economic growth, the Australian Dollar has benefited from the stimulus announcement.
The Australian Dollar FAQs
One of the most important factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). As Australia is a resource-rich country, another key factor is the price of its largest export, iron ore. The health of the Chinese economy, its largest trading partner, is a factor, as is inflation in Australia, its growth rate and the Balance of Trade. Market sentiment, that is, whether investors bet on riskier assets (risk-on) or seek safe havens (risk-off), is also a factor, with the risk-on being positive for the AUD.
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 RBA’s main objective 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 ones. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the AUD and the latter being positive for the AUD.
China is Australia’s largest trading partner, so the health of the Chinese economy greatly influences the value of the Australian Dollar (AUD). When the Chinese economy is doing well, it buys more raw materials, goods and services from Australia, which increases demand for the AUD and drives up its value. The opposite occurs when the Chinese economy does not grow as fast as expected. Therefore, positive or negative surprises in Chinese growth data usually have a direct impact on the Australian Dollar.
Iron ore is Australia’s largest export, with $118 billion a year according to 2021 data, with China being its main destination. The iron ore price, therefore, may be a driver of the Australian dollar. Typically, if the price of iron ore rises, the AUD also rises as aggregate demand for the currency increases. The opposite occurs when the price of iron ore falls. Higher iron ore prices also tend to result in a higher likelihood of a positive trade balance for Australia, which is also positive for the AUD.
The trade balance, which is the difference between what a country earns from its exports and 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, its currency will gain value solely from the excess demand created by foreign buyers wanting to purchase its exports versus what it spends on purchasing imports. Therefore, a positive net trade balance strengthens the AUD, with the opposite effect if the trade balance is negative.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
