- The decline in the Australian Dollar is supported by the RBA’s hawkish outlook.
- Markets now hint at rate cuts no earlier than February 2025.
- The upcoming CPI figures for May will be critical for markets to anticipate the RBA’s next moves.
Tuesday’s session saw a decline in the Australian Dollar (AUD) as it slid to the 0.6650 mark against the US Dollar, approaching the 20-day SMA at 0.6640. Australia’s upcoming inflation data remains in focus as it is expected to shape the RBA’s future moves. The low level data reported during the Asian sessions did not significantly affect the position of the AUD.
In Australia, despite signs of a weakening economy, persistently high inflation acts as a headwind to potential Reserve Bank of Australia (RBA) rate cuts, which could limit downward pressure on the Aussie .
Daily Market Summary: AUD Sees Red Ahead of CPI Figures
- In June, the Westpac Melbourne Institute Consumer Confidence Index in Australia saw a 1.7% increase, reaching 83.6 compared to 82.2 in May and marking the first increase since February.
- Despite this rebound, consumer sentiment remains significantly bearish, with the index still well below the neutral 100 level.
- Markets are gearing up for the release of the May Consumer Price Index (CPI) on Wednesday, anticipating possible changes to guide the RBA’s upcoming decisions.
- The swaps market has readjusted its odds to a less than 25% chance of a rate cut by December 2024, rising to around a 65% chance by February 2025, signaling the RBA’s firm approach to tackling inflation. .
- Last week, Fed Governor Michelle Bullock introduced a new stance, stating that the RBA will “do what is necessary” to return inflation to its target. Consequently, with the RBA ruling out rate cuts, the AUD’s decline will remain limited.
Technical Analysis: AUD/USD faces pullback, buyers aim to defend 20-day SMA
From a technical point of view, adjustments are observed in the indicators. The RSI continues above 50 but indicates a downward trend.
Similarly, the MACD persists in the negative sphere with a sequence of red bars. The coming sessions depend on buyers holding AUD/USD above the 20-day SMA, a line of defense with the potential to establish promising momentum for the pair’s future outlook.
The RBA
The Reserve Bank of Australia (RBA) sets interest rates and manages Australia’s monetary policy. Decisions are made by a Council of Governors in 11 meetings a year and in any ad hoc emergency meetings that are necessary. The RBA’s main mandate is to maintain price stability, which means an inflation rate of 2%-3%, but also “…contribute to currency stability, full employment and economic prosperity and well-being of the Australian people. Its main tool to achieve this is to raise or lower interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening monetary policy.
Although inflation has traditionally always been considered a negative factor for currencies, since it reduces the value of money in general, the truth is that in modern times the opposite has happened with the relaxation of cross-border capital controls. Moderately high inflation now tends to lead central banks to raise interest rates, which in turn has the effect of attracting more capital inflows from global investors looking for a lucrative place to store their money. This increases the demand for the local currency, which in the case of Australia is the Australian Dollar.
Macroeconomic data gauges the health of an economy and can impact the value of its currency. Investors prefer to invest their capital in safe and growing economies than in precarious and contracting economies. A greater influx of capital increases aggregate demand and the value of the national currency. Classic indicators such as GDP, manufacturing and services PMIs, employment and consumer sentiment surveys can influence the AUD. A strong economy may encourage the Reserve Bank of Australia to raise interest rates, also supporting the AUD.
Quantitative Easing (QE) is a tool used in extreme situations in which lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) in order to purchase assets – typically government or corporate bonds – from financial institutions, providing them with much-needed liquidity. . QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is carried out after QE, when the economic recovery is underway and inflation begins to rise. While in QE the Reserve Bank of Australia (RBA) buys government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets and stops reinvesting the maturing principal of the bonds. bonds you already own. It would be positive (or bullish) for the Australian Dollar.
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.
