- AUD/USD drops sharply below 0.6400 as RBA delivers softer interest rate guidance.
- RBA Bullock was confident of reducing upside risks to price pressures.
- Investors are awaiting US inflation and Australian employment data for November.
The AUD/USD pair plummets below the key support of 0.6400 in the European session on Tuesday. The Australian pair weakens as Reserve Bank of Australia (RBA) Governor Michele Bullock delivered softer interest rate guidance after leaving her official lending rate (OCR) unchanged at 4.35% for the ninth time. consecutive meeting.
Michele Bullock was mildly confident that inflation will return to the bank’s 2% target. “The upside risks to inflation had reduced but not disappeared,” Bullock said. Asked whether the RBA will cut interest rates at its February meeting, Bullock said the decision would depend on data, but she was confident wages and demand were slowing.
Ahead of the RBA policy decision, analysts at ANZ and Westpac predicted the RBA will begin cutting interest rates from May 2025.
This week, investors should prepare for more volatility in the Australian Dollar (AUD) as domestic employment data is scheduled to be released on Thursday.
Meanwhile, the US Dollar (USD) rises ahead of the United States (US) Consumer Price Index (CPI) data for November, due to be released on Wednesday. Inflation data will influence market speculation on the Federal Reserve’s (Fed) interest rate action at the December 18 policy meeting.
There is a nearly 86% chance that the Fed will cut interest rates by 25 basis points (bps) to 4.25%-4.50%, according to the CME FedWatch tool.
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.
