- AUD/USD consolidates below 0.6300 as investors await the US CPI data for February.
- The US Dollar has remained under pressure amid deepening US economic risks.
- The US-China trade war has diminished the appeal of the Australian Dollar.
The AUD/USD pair trades in a tight range below the key level of 0.6300 in Wednesday’s European session. The Aussie pair consolidates as investors await the United States (US) Consumer Price Index (CPI) data for February, which will be published at 12:30 GMT.
Investors await the US inflation data to get fresh cues about whether the Fed will cut interest rates in the May meeting. In the policy meeting next week, the Fed is almost certain to keep interest rates steady in the range of 4.25%-4.50%. According to the CME FedWatch tool, there is a 42% chance that the central bank will cut interest rates in May, increased significantly from 10.4% seen a month ago.
The US CPI report is expected to show that year-on-year headline inflation rose at a slower pace of 2.9%, compared to a 3% increase seen in January. In the same period, the core CPI – which excludes volatile food and energy prices – is expected to have decelerated to 3.2% from the prior release of 3.3%.
Ahead of the US inflation data, the US Dollar Index (DXY) is marginally higher from its four-month low of 103.35. The US Dollar (USD) has remained on the backfoot as investors worry about the US economic outlook under the leadership of President Donald Trump. On Tuesday, the comments from US Commerce Secretary Howard Lutnick indicated that Trump's policies are worth fears that they could lead to a recession.
Meanwhile, the upside in the Australian Dollar (AUD) remains capped amid fears that the US-China trade war could result in a sharp decline in Australia’s business activity, knowing that Australia relies heavily on exports to China. Till now, the US has imposed 20% tariffs on imports from China.
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.
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