AUD/USD posts fresh six-month high near 0.6800 as US Inflation cools further
- AUD/USD jumps to near 0.6800 as soft US inflation boosts Fed rate-cut bets.
- US annual headline and core inflation decelerated sharply in June.
- The RBA may cut interest rates next year.
The AUD/USD pair jumps close to the crucial resistance of 0.6800 in Thursday’s American session. The Aussie asset strengthens as the US Dollar (USD) plunges after the United States (US) Consumer Price Index (CPI) report showed that inflationary pressures cool down again in June. This has prompted expectations for the Federal Reserve (Fed) to start reducing interest rates from the September meeting.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, tumbles to near 104.00.
US annual core inflation, which excludes volatile food and energy prices, came in lower at 3.3% than estimates and May’s reading of 3.4%. In the same period, the headline inflation decelerated at a faster pace to 3.0% from expectations of 3.1% and the former release of 3.3%.
On month, headline inflation deflated by 0.1% and the core CPI grew at a slower pace of 0.2%. Soft inflation figures would deliver more confidence to Fed policymakers to discuss on an early return to the policy normalization process.
According to the CME FedWatch tool, 30-day Federal Fund Futures price data indicates that a rate-cut in September is a done deal. The probability for Fed rate cuts has increased to 89% from 74.4% recorded a week ago.
On the Asia-Pacific front, growing speculation that the Reserve Bank of Australia (RBA) will not cut interest rates this year has kept the near-term outlook of the Australian Dollar firm. The RBA would be one of the last to join the global rate-cut cycle as price pressures have revamped in Australia.
Australian Dollar FAQs
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.
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.
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.
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.
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.
