- AUD/USD rises on weaker US Dollar following 50 basis point rate cut by the Federal Reserve.
- The Fed anticipates slower GDP growth and higher unemployment, while inflation is expected to decline.
- The RBA’s hawkish stance also supports the Australian dollar.
The AUD/USD rose 0.70% to 0.6815 in Thursday’s session. This marks the fourth consecutive session of gains for the AUD/USD as the US Dollar continues to weaken following the Federal Reserve’s (Fed) 50 basis point rate cut. The Fed’s decision to cut rates was driven by concerns over global economic growth and rising unemployment.
Economic prospects for Australia remain uncertain. Despite mixed indicators, the Reserve Bank of Australia (RBA) remains cautious due to elevated inflation. As a result, financial markets currently anticipate a modest rate cut of 25 basis points in 2024, reflecting the RBA’s intention to maintain a hawkish monetary stance to combat inflationary pressures.
Daily Market Wrap: Australian Dollar Rises as Markets Punish USD Following Fed and Australian Jobs Data
- The US Dollar (USD) weakened on Thursday as selling interest increased following the Federal Reserve’s decision to cut interest rates more than expected.
- Gains in copper and iron ore prices also supported the AUD, although concerns over China’s housing and industrial sectors may limit upside potential.
- The Reserve Bank of Australia (RBA) kept its official cash rate (OCR) steady at 4.35% last month, signalling a cautious approach amid ongoing inflationary pressures.
- RBA Governor Michelle Bullock reiterated a cautious outlook, suggesting rate cuts are unlikely in the near future.
- Despite the RBA’s hawkish stance, the market is anticipating rate cuts by the end of 2024, with a 70% chance of a 25 basis point cut by December.
- A mixed Australian labour market report for August showed an unchanged unemployment rate of 4.2%, while job changes rose by 47,500 people.
AUD/USD Technical Outlook: Pair Adopts Positive Bullish Bias Indicators
Indicators continue to gain ground with the Relative Strength Index (RSI) and the Moving Average Convergence/Divergence (MACD) indicator indicating increasing buying traction. Moreover, with the pair at its highest level since January, the outlook is positive. Buyers must now hold the 0.6800 area.
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 data, 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.
