AUD/USD halts the downside, Wednesday's Fed decision and US CPI will define the short-term trayectory


  • AUD/USD rebounded on Monday as sellers took a breather.
  • All eyes are now on Wednesday’s session where the US releases inflation figures and the Fed makes its interest rate decision.
  • There won’t be any economic highlights in Monday’s session.

On Monday, the AUD/USD pair experienced a slight rebound toward the 0.6605 area as sellers took profits after Friday’s sharp downward movements. This week will be pivotal as the Federal Reserve (Fed) meets on Wednesday, the same day when the US releases inflation data from May.

On the Australian side, economic activity is seeing some signs of weakness, but the Reserve Bank of Australia (RBA) is expected to be the last G10 country central bank to cut rates as it awaits further evidence of inflation coming down. On the US side, the economic outlook remains strong after the stellar Nonfarm Payrolls (NFP) report on Friday, which demonstrated a strong labor market.

Daily Digest Market Movers: AUD/USD faces pressure as traders await CPI and Fed decision

  • On the US side, markets await Consumer Price Index (CPI) data from May to be released on Wednesday
  • Federal Reserve (Fed) is also meeting on Wednesday, and it's expected to hold rates at 5.5%. Fresh economic projections will also be watched
  • On the RBA’s side, it remains focused on curbing inflation despite signs of slowing growth
  • Market participants are closely monitoring upcoming economic indicators and RBA statements for clues on the AUD/USD pair's direction

Technical analysis: AUD/USD maintains support despite retracement

Following Friday’s drop of 1.20%, the Relative Strength Index (RSI) stands below 50, supporting the bearish sentiment, while the Moving Average Convergence Divergence (MACD) prints red bars, indicating growing selling pressure.

However, the positive outlook remains unchanged as the pair holds above the 100 and 200-day SMAs at around 0.6550.

 

Interest rates FAQs

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

 

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