- The AUD/USD pair is trading back and forth around 0.6550 amid a focus on multiple Australian/US macroeconomic events.
- Inflation in Australia is expected to have risen steadily by 1%.
- The Fed is expected to leave interest rates unchanged, with a dovish stance.
The AUD/USD pair continues to trade sideways around 0.6550 in the European session on Tuesday. The Australian asset is consolidating as investors have remained on the sidelines ahead of Australia’s second quarter GDP, June monthly Consumer Price Index (CPI) and the Federal Reserve (Fed) interest rate decision, which are scheduled for Wednesday.
Market sentiment is favouring risk assets on expectations that the Fed will offer dovish guidance on interest rates, leaving them unchanged in the 5.25%-5.50% range. S&P 500 futures have posted decent gains in London trading hours. The Dollar Index (DXY), which tracks the value of the greenback against six major currencies, is trading flat near 104.60. US 10-year Treasury yields are down slightly near 4.17%.
Investors expect Fed Chairman Jerome Powell to acknowledge progress on inflation and its return toward the 2% target on behalf of policymakers in the monetary policy statement. Powell is also expected to highlight concerns about the strength of the US labor market.
In today’s session, the US JOLTS job openings data for June will be in focus, a key measure of labor demand that will signal a change in the number of job openings posted by employers. The economic data is expected to show that job openings were lower at 8.03 million versus the previous release of 8.14 million.
Meanwhile, the Australian Dollar (AUD) will be guided by inflation data. Price pressures in the second quarter are estimated to have grown steadily by 1.0%, with the annualised figure accelerating to 3.8% from the previous release of 3.6%. Investors will also focus on monthly retail sales data for June, which is estimated to have grown at a slower pace of 0.1% from May’s reading of 0.6%. The economic data will indicate whether market speculation that the Reserve Bank of Australia (RBA) will keep interest rates at their current level throughout the year is appropriate.
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.
