- AUD/USD bulls step in as pair soars to multi-month highs.
- Strong Australian May retail sales figures and weak US ADP data are boosting the pair.
- FOMC minutes show members acknowledge price pressures are easing.
He Australian Dollar (AUD) soared against the USD to its highest level since January following weak US labor market figures and strong Australian retail sales data earlier in the session.
The Australian economy continues to show mixed signs. However, persistently high inflation is causing the Reserve Bank of Australia (RBA) to postpone potential rate cuts. As one of the last G10 central banks to initiate rate cuts, this could extend the Australian Dollar’s gains to some extent.
Daily Market Update: Australian Dollar Soars on Strong Retail Sales, Weak US ADP Data
- Australian retail sales figures for May showed a better-than-expected 0.6% month-on-month rise compared with a 0.1% increase in April, boosted by early sales promotions and events at the end of the financial year.
- The market is now pricing in a nearly 40% chance of a 25 basis point rate hike on September 24, rising to roughly 50% by November 5, making these events key to monitor.
- On Tuesday, minutes from the June meeting provided a more nuanced perspective on the RBA’s hold stance. A major reason why members of the bank favoured keeping the policy rate unchanged rather than implementing a hike was due to “uncertainty around consumption data and clear evidence that many households were experiencing financial stress.”
- However, the minutes reflected that the bank left the door open for an increase.
- On the US front, ADP-reported US private sector employment came in at 150,000, lower than the 160,000 expected, and showed signs of a cooling labor market.
- As for Federal Reserve (Fed) expectations, markets are now more confident of a cut in September, betting on a nearly 70% probability.
- The FOMC minutes give the market reason to be hopeful, as they showed that members are acknowledging a slowdown in inflation.
Technical Analysis: AUD/USD finds momentum, outlook now favors bulls
After the pair traded sideways since mid-May within the 0.6600-0.6700 range, the AUD/USD has surged above 0.6700 for the first time since January. Indicators including the RSI and MACD jumped further into positive territory.
On the downside, the 20-day Simple Moving Average (SMA) at 0.6640 provides firm support, with additional support at 0.6620 levels and the psychological threshold of 0.6600. Resistance lies at 0.6730 and 0.6750.
The RBA
The Reserve Bank of Australia (RBA) sets interest rates and manages Australia’s monetary policy. Decisions are made by a Board of Governors at 11 meetings per year and at ad hoc emergency meetings as necessary. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2%-3%, but also to “…contribute to currency stability, full employment and the economic prosperity and well-being of the Australian people.” Its main tool for achieving this is to raise or lower interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other tools of the RBA are quantitative easing and monetary tightening.
Although inflation has traditionally always been considered a negative factor for currencies, as it reduces the value of money in general, the opposite has actually occurred in modern times with the relaxation of cross-border capital controls. Moderately high inflation now tends to lead central banks to raise their 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 demand for the local currency, which in Australia’s case 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, growing economies rather than in weak, shrinking ones. Greater capital inflows boost aggregate demand and the value of the domestic 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 where 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 – usually government or corporate bonds – from financial institutions, thereby 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 is starting 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 it already holds. This 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.
