Australian Dollar drifts higher above 0.7100 after RBA's Bullock speech
- AUD/USD edges higher to around 0.7120 in Tuesday’s early European session.
- RBA hawkish tone supports the Australian Dollar.
- Traders are pricing in a 56.5% probability of a Fed rate hike in October.
The AUD/USD pair gains ground to near 0.7120 during the early European trading hours on Tuesday. The Australian Dollar (AUD) strengthens against the US Dollar (USD) following Reserve Bank of Australia (RBA) Governor Michele Bullock’s speech. Traders brace for the Fedspeak later on Tuesday for fresh impetus.
RBA Governor Michele Bullock said on Tuesday that supply shocks are difficult for monetary policy to deal with, adding that policy needs to address the second-round effects of such shocks on inflation.
These comments came ahead of the RBA's September 28-29 policy meeting. The Australian central bank is likely to raise its key interest rate next week as surging energy prices crystallise upside risks to inflation, Bloomberg Economics said, warning of a possible further hike in November.
Money markets are pricing about a 90% chance the RBA will hike by a quarter-percentage point to 4.6%next week, according to Bloomberg.
The Federal Reserve (Fed) raised interest rates to 3.75%–4.00% and hinted at further hikes before year-end. Hawkish remarks from Fed officials reinforced expectations for further interest rate hikes, supporting the Greenback. Chicago Fed President Austan Goolsbee said on Monday that the central bank cannot overlook repeated and persistent supply shocks.
Meanwhile, St. Louis Fed President Alberto Musalem stated that additional rate increases may be necessary to achieve the Fed’s inflation target. Traders are now pricing in nearly a 56.5% probability for a rate hike of at least 25 basis points (bps) at the Fed's October meeting, according to the CME FedWatch tool, up from 43.5% a week earlier.
RBA hike odds climb as OIS market prices in aggressive move
Analysts at Commerzbank point out that rate expectations have shifted decisively ahead of next week’s RBA meeting, with the bank noting that the “RBA’s OIS market is now pricing in 85% chance of a 25bp hike during next week’s monetary policy board meeting.” They suggest this elevated probability underscores the market’s conviction that the RBA is leaning toward further tightening, reinforcing support for the Australian Dollar into the decision.
Technical Analysis: AUD/USD maintains a constructive outlook in the near term
In the daily chart, AUD/USD holds above both the Bollinger Bands lower band and the 100-day simple moving average (SMA), which collectively underpin a constructive near-term tone. Price remains below the Bollinger middle band, suggesting the advance is still capped by overhead supply, while the Relative Strength Index (14) at 47 stays near neutral, hinting at consolidative rather than impulsive momentum.
On the topside, initial resistance emerges at the Bollinger middle band around 0.7160, ahead of a higher barrier at the Bollinger upper band near 0.7235. On the downside, immediate support is seen at the lower Bollinger band at 0.7085, followed by the 100-day SMA at 0.7075, where a deeper pullback would be expected to attract dip-buying interest as long as these underlying levels hold.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when 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) for the purpose of buying 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 undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
Author
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
