- AUD/USD faces resistance near 0.6380 ahead of preliminary US S&P Global PMI data for December.
- The Fed is almost certain to cut interest rates by 25 bps on Wednesday.
- Upbeat Australian jobs data weighs on RBA’s dovish bets.
The AUD/USD pair gives up its intraday gains and remains flat after failing to extend its bullish move above 0.6380 in the North American session on Monday. Australian pair gives up gains as US Dollar (USD) recoups intraday losses ahead of preliminary S&P Global United States (US) Purchasing Managers’ Index (PMI) data for December, due out later 14:45 GMT.
The US Dollar Index (DXY), which tracks the value of the dollar against six major currencies, is teetering near 107.00.
Economists expect the US composite PMI to have expanded, but at a slower pace due to cooler growth in the services sector and a sharp contraction in the manufacturing sector. Investors will also pay close attention to new orders data and respondents’ views on potential protectionist policies from incoming President-elect Donald Trump.
The Federal Reserve’s (Fed) monetary policy decision, which will be announced on Wednesday, will be the main trigger for the US dollar this week. According to the CME’s FedWatch tool, traders have fully priced in a 25 basis point (bp) interest rate cut to 4.25%-4.50%.
Investors will also focus on the Fed’s dot chart and inflation outlook to see if officials see the fed funds rates heading in the medium to long term. According to a Bloomberg survey, the Fed is expected to make three interest rate cuts in 2025.
Meanwhile, the Australian Dollar (AUD) will be influenced by market expectations about when the Reserve Bank of Australia (RBA) will begin reducing interest rates. The RBA’s dovish bets faded after better-than-expected Australian jobs data.
The Australian economy added 35.6K workers, higher than estimates of 25K and the previous release of 12.1K. The unemployment rate surprisingly fell to 3.9% from 4.1% in October, which was expected to rise to 4.2%.
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.
