AUD/USD falls slightly as US Dollar trades steadily ahead of US Services PMI
- AUD/USD ticks lower as the US Dollar gains ground, while its outlook remains uncertain.
- The Fed will likely cut interest rates in the September meeting.
- Investors await the US Services PMI data for July.
The AUD/USD pair edges lower to near 0.6450 during the European trading session on Tuesday. The Aussie pair ticks down as the US Dollar (USD) gains ground, following the soft United States (US) Nonfarm Payrolls (NFP)-driven sell-off.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.25% higher around 99.00. On Friday, the DXY plunged more than 1.4% after the NFP report showed signs of weak labor demand.
Cooling labor market conditions have prompted traders to raise bets favoring interest rate cuts by the Federal Reserve (Fed) in the September meeting.
According to the CME FedWatch tool, the probability of the Fed to cut interest rates in the September meeting has increased to 92.2% from 41.2% seen on Thursday, a day before the release of the Nonfarm Payroll (NFP) data for July.
In Tuesday’s session, investors will focus on the US revised S&P Global and ISM Services PMI data for July. Economists expect the ISM Services PMI, which gauges activities in the services sector, that accounts for the two-third of the economy, to come in at 51.5, higher than 50.8 in June.
Meanwhile, the Australian Dollar (AUD) is expected to remain under pressure as the Reserve Bank of Australia (RBA) is almost certain to cut interest rates in the monetary policy meeting this month. Traders are increasingly confident about an interest rate reduction this month as price pressures have cooled down.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
