- AUD/USD hits a fresh three-week high at 0.6640 with US inflation and Australian employment in focus.
- Traders are divided on the size of the Fed’s September interest rate cut.
- The RBA is expected to keep its official cash rate (OCR) steady at 4.35% by the end of the year.
The AUD/USD pair is holding near a fresh three-week high at 0.6640 in the European session on Wednesday. The Australian asset is holding on to gains as the US Dollar (USD) is falling ahead of the US (US) Consumer Price Index (CPI) data for July, due out at 12:30 GMT.
Investors will be keenly focused on US inflation data as it will influence market speculation on the size of interest rate cuts by the Federal Reserve (Fed) at the September meeting. The CME FedWatch tool shows traders are pricing in a 54.5% chance of a 50 basis point (bp) rate cut in September.
The US CPI report is expected to show that monthly headline and core inflation rose by 0.2%. Annual headline and core inflation are estimated to have slowed by one-tenth to 2.9% and 3.2%, respectively.
Meanwhile, market sentiment remains stable ahead of the release of US inflation data. S&P 500 futures have posted nominal gains in European trading hours. The US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, falls further below 102.50. US 10-year Treasury bond yields fall near 3.84%.
The Australian Dollar (AUD) remains on the sidelines as investors await Australian employment data for July, due on Thursday. Economists expect labour demand to remain sluggish in July, with new payrolls forecast at 26,500, down from June’s reading of 50,200. The unemployment rate is expected to remain stable at 4.1%.
Labour market data will influence expectations for the Reserve Bank of Australia’s (RBA) interest rate path. The RBA is currently expected to leave its official cash rate (OCR) unchanged at 4.35% for the full year.
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). Since 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 Trade Balance. Market sentiment, i.e. whether investors are betting on riskier assets (risk-on) or seeking safe havens (risk-off), is also a factor, with 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 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 is not growing as fast as expected. Therefore, positive or negative surprises in Chinese growth data often have a direct impact on the Australian Dollar.
Iron ore is Australia’s largest export, worth $118 billion per year as of 2021 data, with China being its main destination. The price of iron ore can therefore be a driver of the Australian dollar. Typically, if the price of iron ore rises, the AUD rises as well, as aggregate demand for the currency increases. The opposite occurs when the price of iron ore falls. Higher iron ore prices also tend to lead to a higher probability 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 because of the excess demand created by foreign buyers wanting to purchase its exports versus what it spends on buying 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.
