- The AUD/USD continues to trade sideways around the 20-day SMA.
- Wednesday’s Fed Minutes follow the RBA’s turn.
- Australian May retail sales and US ADP figures are also due out on Wednesday.
- Fed Chairman Jerome Powell expressed confidence that inflation will return to 2% sooner than expected.
Tuesday’s session saw the Australian Dollar (AUD) recover losses against the US Dollar following the release of the hawkish Reserve Bank of Australia (RBA) minutes and the US JOLTs figures for May. For the USD, Jerome Powell’s confidence that inflation will ease again sooner than expected due to prospects of a cooling labour market weakened the Dollar.
The Australian economy is showing some signs of weakness. However, persistently high inflation is leading the RBA to delay potential rate cuts. The RBA is expected to be one of the last central banks in the G10 countries to start cutting rates, which may limit the Australian dollar’s fall.
Daily Market Wrap: Australian Dollar Recovers Losses as Market Evaluates Latest RBA Minutes
- The RBA minutes from its June meeting offered further detail on the bank’s pause stance. One of the main reasons RBA members saw a stronger case for leaving the policy rate unchanged rather than an increase was “uncertainty around consumption data and clear evidence that many households were experiencing financial stress.”
- Australian sales figures for May are due to be released on Wednesday. They are expected to rise 0.3% month-on-month compared with 0.1% in April and their outcome will be key.
- Markets are predicting a 25% chance of a 25 basis point rate hike at the RBA’s next meeting on August 6.
- In the US, JOLT job postings exceeded 8 million in May.
- In addition, Jerome Powell was on the media and admitted some progress in inflation and that the rate could reach 2% next year.
- For now, the market sees a 70% chance of a Fed rate cut in September, but it will largely depend on upcoming data.
Technical Analysis: AUD/USD swings above 20-day SMA
From a technical perspective, the AUD/USD pair has continued a sideways trading trend since mid-May. The 20-day Simple Moving Average (SMA) at 0.6640 provides strong support, with further support found at the 0.6620 and 0.6600 levels. Critical resistance levels are currently set at 0.6660, 0.6690 and 0.6700. This supports a continuation of the established 0.6600-0.6700 range.
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.
