AUD/USD hovers near six-month high near 0.6750 on firm Fed rate-cut prospects

AUD/USD holds gains near a six-month high around 0.6750 as traders raise Fed rate-cut bets.
The US labor market strength appears to have lost momentum.
The RBA could tighten its monetary policy further.

Sagar Dua FXStreet

The AUD/USD pair trades close to a six-month high at 0.6760 in Monday’s New York session. The Aussie asset holds gains as the US Dollar (USD) is on the backfoot due to growing speculation that the Federal Reserve (Fed) will begin reducing interest rates from the September meeting.

Traders raise bets for Fed rate cuts in September as the US labor market strength appears to be moderating. June’s Nonfarm Payrolls (NFP) report showed that the Unemployment Rate rose to 4.15 in more than two years. Also, Average Hourly Earnings, a measure of wage growth, has declined expectedly, which has trimmed the risks of inflation remaining persistent.

Higher expectations for early Fed rate cuts have improved the market sentiment. S&P 500 futures have recovered losses delivered in early Europe and have turned positive. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, has fallen to a near a three-week low of around 104.85.

Contrary to market expectations, Fed officials signalled in their latest dot plot that there will be only once rate cut this year. Going forward, US Consumer Price Index (CPI) report for June will be the major trigger, which will be published on Thursday. The US inflation will influence market expectations for Fed rate cuts in September.

On the Aussie front, surged expectations that the Reserve Bank of Australia (RBA) could tighten its policy further have kept the Australian Dollar (AUD) strong. Upside risks to price pressures have boosted bets for more rate hikes by the RBA.

Being a proxy player to world’s second-largest economy, the Australian Dollar will be impacted by China’s CPI report for June, which will be published on Wednesday. The report is expected to show that price pressures grew at a higher pace of 0.4% from the prior release of 0.3% on year.

Australian Dollar FAQs

What key factors drive the Australian Dollar?

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.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

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.

How does the health of the Chinese Economy impact the Australian Dollar?

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.

How does the price of Iron Ore impact the Australian Dollar?

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.

How does the Trade Balance impact the Australian Dollar?

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

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.

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