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Australian Dollar Rises Modestly on Quiet Wednesday as Markets Brace for US CPI

  • The AUD posted slight gains against the USD on Wednesday.
  • Markets are still deciphering Jerome Powell’s cautious stance, which limits USD traction.
  • The RBA’s hawkish stance provides stable support for the Australian Dollar.

He Australian Dollar (AUD) The pair continued its positive trend against the USD on Wednesday, rising slightly near 0.6750. Despite there being no significant events on the horizon for the Australian financial scene this week, the pair still maintains its strength, with the AUD continuing its recent gains. On the US side, markets are awaiting clues on the Federal Reserve’s (Fed) plans.

The Reserve Bank of Australia (RBA) is set to be one of the last central banks among G10 nations to initiate rate cuts, a factor boosting the AUD.

Market Drivers Daily Update: AUD holds firm after Powell’s remarks

  • Jerome Powell on Wednesday stressed the need to pay closer attention to the labor market, citing that it has deteriorated significantly.
  • He also expressed a degree of confidence regarding the downward trend in inflation.
  • He said achieving price stability without harming employment is possible, but he did not provide a specific figure for inflation or unemployment as a reference for deciding on rate cuts.
  • The US CPI figures, due on Thursday, will be crucial. The headline figure is projected to ease slightly to 3.1% y/y, while the core figure is expected to remain stable at 3.4% y/y.
  • On the RBA side, markets are betting on a nearly 50% chance of a hike in September or November. On the Fed side, investors are banking on an 80% chance of a cut in September.

Technical Analysis: AUD/USD gains continue, consolidation expected

The AUD/USD continues on an upward trajectory, resulting in gains for the pair on Wednesday. The outlook remains positive with indicators such as the RSI and MACD holding strong in deep positive territory.

Following the pair’s performance reaching its highest level since January, the trend suggests an optimistic outlook. However, traders seem to be on the lookout for consolidating these gains, which is limiting the upside.

Support levels to monitor are 0.6670, 0.6650 and 0.6630 in case of a correction.

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 the 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 owns. This would be positive (or bullish) for the Australian dollar.

Source: Fx Street

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