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AUD/USD regains some ground after NFP-induced losses, focus on Fed and CPI

  • AUD/USD rebounded on Monday as sellers took a pause.
  • All eyes now focus on Wednesday’s session, when the US publishes inflation figures and the Fed makes its decision on interest rates.
  • There will be no notable economic events in Monday’s session.

On Monday, the AUD/USD pair saw a slight rebound towards the 0.6605 area as sellers took profits after Friday’s strong downward moves. This week will be crucial as the Federal Reserve (Fed) meets on Wednesday, the same day the US releases May inflation data.

On the Australian side, economic activity is showing some signs of weakness, but the Reserve Bank of Australia (RBA) is expected to be the last central bank in G10 countries to cut rates as it awaits further evidence that inflation is decreasing. On the US side, the economic outlook remains strong after Friday’s spectacular Nonfarm Payrolls (NFP) report, which demonstrated a strong labor market.

Daily Market Summary: AUD/USD Faces Pressure as Traders Await CPI, Fed Decision

  • On the US side, markets await May Consumer Price Index (CPI) data to be released on Wednesday
  • The Federal Reserve (Fed) also meets on Wednesday, and is expected to keep rates at 5.5%. New economic projections will also be observed
  • On the RBA side, it remains focused on curbing inflation despite signs of slowing growth
  • Market participants are closely monitoring upcoming economic indicators and RBA statements for clues on the direction of the AUD/USD pair.

Technical analysis: AUD/USD maintains support despite pullback

Following Friday’s 1.20% drop, the RSI is below 50, supporting the bearish sentiment, while the MACD Indicator creates red bars, indicating increasing selling pressure.

However, the positive outlook remains unchanged as the pair remains above the 100-day and 200-day SMAs around 0.6550.

The Australian dollar

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

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