AUD/USD extends the decline to near 0.6350 as Fed rate decision looms
- AUD/USD trades in negative territory around 0.6355 in Monday’s early Asian session.
- The Fed is expected to cut the rate by 25 bps at its December meeting on Wednesday.
- The dovish stance of the RBA undermines the Aussie.
The AUD/USD pair extends its downside to near 0.6355 during the early Asian session on Monday, pressured by the firmer Greenback. Traders will keep an eye on the preliminary US December Purchasing Managers Index (PMI) on Monday ahead of the Federal Reserve (Fed) interest rate decision.
The two-day Fed meeting ends Wednesday with an expected 25 basis points (bps) cut. Analysts expect the US central bank to cut whilst preparing the market for a pause as the US economy is robust and progress on inflation may be stalling above 2%. Markets are now almost fully pricing a 25 basis points (bps) cut at the Fed's December meeting, compared with about 78% odds a week ago, according to the CME FedWatch tool.
The Fed Chair Jerome Powell’s press conference and Dot Plots will be closely monitored. Any hawkish remarks from Fed officials could lift the US Dollar (USD) and act as a headwind for the pair. Powell maintained a cautious tone earlier this month, saying, “We can afford to be a little more cautious as we try to find neutral.” Powell signaled that he is not in a hurry to reduce rates. "The economy is strong, and it's stronger than we thought it was going to be in September,” said Powell.
On the other hand, the dovish tilt in the Reserve Bank of Australia’s (RBA) stance weighs on the Aussie. Traders raise their bet that the RBA will cut interest rates sooner and likely deeper than initially expected. Nonetheless, future decisions will be data-driven, with evolving risk assessments shaping the RBA’s approach.
Data released by Judo Bank and S&P Global showed on Monday that the Australia's Judo Bank Manufacturing Purchasing Managers Index (PMI) declined to 48.2 in December from 49.4 in November. Meanwhile, the Services PMI eased to 50.4 in December from the previous reading of 50.5. The Composite PMI dropped to 49.9 in December versus 50.2 prior.
Additionally, Chinese authorities led by President Xi Jinping vowed to raise the fiscal deficit target next year with a shift of policy focus to consumption in an effort to boost the economy as looming US tariffs threaten exports. Investors are hoping for fiscal support as monetary measures disappoint and lack concrete details on policies, dragging the Australia Dollar (AUD) lower against the USD.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for 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 main goal of the RBA 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. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus 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, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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.
