AUD/USD bounces up and returns above 0.6600 as the US Dollar retreats
- The Aussie Dollar bounces at 0.6575, returns above 0.6600 as the USD pulls back on a choppy trading session
- Market sentiment has improved somewhat ahead of US PMIs and Fed Powell's speech.
- Fed - RBA monetary policy divergence is likely to support the AUD.
The Australian Dollar has returned to levels right above 0.6600 against the US Dollar on a choppy trading session on Tuesday. The Aussie drew support from a declining US Dollar, with market sentiment improving ahead of the release of US flash PMIs and Fed Powell’s conference, due later today.
US business activity is expected to have slowed in both the manufacturing and services sectors, but remains at levels consistent with moderate growth. The risk, however, is of a negative surprise that would resurface concerns about the negative impact from tariffs and add pressure on the Fed to cut rates further.
Fed - RBA monetary policy divergence might support the Aussie
The PMI figures are likely to frame Fed Chair Jerome Powell’s conference about the economic outlook at Providence’s Chamber of Commerce. Powell curbed hopes of a steep monetary easing after the monetary policy decision, citing looming inflationary pressures and sent the US Dollar higher against its main peers.
US Dollar’s recovery seems to have lost steam this week. Fed speakers provided a wide range of monetary policy views on Monday. Their comments left the odds for a quarter-point rate cut in November unchanged at 90%, and about a 70% chance of another one in December, according to the CME Fed Watch tool.
In Australia, the RBA Governor, Michelle Bullock, defended that inflation is in a “very good position” on a hearing before a parliamentary committee, but warned about the uncertain trade environment. Her words support the idea that the bank will stand pat on rates at next week’s meeting, which provided some support to the AUD.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
