- AUD/USD regains ground ahead of FOMC, while USD consolidates losses.
- Chinese data concerns weigh on AUD.
- The hawkish RBA keeps the Australian dollar afloat on Tuesday.
The AUD/USD has regained ground in Tuesday’s session and attracted some follow-through buyers, rising to a near two-week high of 0.6755. The Australian Dollar is feeling the pinch from the US Dollar’s consolidating losses as well as concerns over economic data coming out of China. Additionally, a positive risk tone has weakened the USD, adding to the AUD/USD’s gains.
Due to mixed economic signals and the Reserve Bank of Australia’s (RBA) hawkish stance on inflation, market expectations for interest rate cuts have been reduced. Market observers now anticipate only a modest 25 basis point reduction in 2024, reflecting a more cautious outlook on the Australian economy.
On Tuesday, the US released August retail sales data that did not impact the USD but beat expectations as the focus is on Wednesday’s Fed decision.
Daily Market Wrap: Australian Dollar Steady Ahead of Fed
- The US dollar is consolidating recent losses on bets of a 50 basis point rate cut by the Fed.
- RBA’s hawkish outlook supports risk-sensitive Australian dollar.
- The fundamental backdrop is supportive for the AUD, but concerns over China’s economic slowdown could act as a headwind.
- Soft US retail sales data saw little market reaction, although US data may be limited as the focus remains on the Fed’s interest rate decision on Wednesday.
- The Fed is expected to cut interest rates by 25 basis points, according to analysts, but a 50 basis point cut remains more likely, according to the CME FedWatch tool.
- A smaller-than-expected rate cut could boost the US dollar and weigh on the AUD.
- A dovish Fed stance could benefit the AUD, while a hawkish stance could strengthen the USD.
AUD/USD Technical Outlook: Pair extends gains on US Dollar weakness
The AUD/USD pair extended gains for the second consecutive day, marking a week-long uptrend. At the start of the European session, the Australian Dollar hit its highest point in a week, holding above the 0.6750 area.
The indicators are promising, and if the pair stays above the 20-day simple moving average (SMA), the outlook will turn positive.
The Australian Dollar
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, 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 compared to 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.
