- AUD/USD trades sideways below 0.6300 as investors have been sidelined due to the absence of a full-fledged Trump tariff plan.
- The Fed is expected to leave interest rates unchanged on Wednesday.
- Investors await the Australian Q4 CPI data, which will influence expectations for RBA’s policy decision next month.
The AUD/USD pair trades in a narrow range below the immediate resistance of 0.6300 in Thursday’s North American session. The Aussie pair is stuck in a tight range as investors seek more clarity on United States (US) President Donald Trump’s tariff plan.
Donald Trump has not released his full-fledged tariff plan yet, but market participants were anticipating that he would unveil tariff hikes for all trading partners soon after returning to the White House. He has only signaled that his neighbors, Canada and Mexico, could attract 25% tariffs, and China could face 10%, which will come into effect on February 1.
The release of fewer Trump tariff plans has kept investors on their toes. This has led to caution among investors towards risk-sensitive assets, which has improved the safe-haven demand of the US Dollar (USD). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, gains ground after posting a fresh two-week low near 107.75 but is trading subduedly, at the time of writing.
Meanwhile, investors shift their focus to the Federal Reserve’s (Fed) monetary policy announcement on Wednesday. Investors will mainly focus on the Fed’s monetary policy guidance as it is widely anticipated to keep interest rates unchanged in the range of 4.25%-4.50%.
On the Aussie front, investors await the Q4 Consumer Price Index (CPI) data, which will be released on Wednesday. The inflation data will significantly influence market speculation about whether the Reserve Bank of Australia (RBA) will start reducing interest rates from the monetary policy meeting next month. Currently, traders fully price in a 25-basis points (bps) interest rate reduction by the RBA in February that will push interest rates lower to 4.10%.
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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