AUD/USD sits near multi-week top, bulls await sustained strength beyond 0.6600 mark

AUD/USD regains positive traction and climbs back closer to a multi-week top touched on Friday.
The RBA’s hawkish stance and a positive risk tone turn out to be key factors benefiting the Aussie.
China’s economic woes could act as a headwind ahead of the US inflation figures later this week.

Haresh Menghani FXStreet

The AUD/USD pair catches fresh bids during the early part of the European session and climbs back closer to a two-and-half-week top touched on Friday. Spot prices currently trade around the 0.6600 round-figure mark, with bulls looking to build on the momentum beyond the technically significant 200-day Simple Moving Average (SMA).

The Australian Dollar (AUD) continues to draw support from the Reserve Bank of Australia's (RBA) stance, showing readiness to hike interest rates further to combat still sticky inflation. In fact, RBA Governor Michele Bullock last week emphasized the need to stay vigilant about inflation risks and said that the central bank will not hesitate to tighten monetary policy again if needed. This, along with a generally positive tone around the equity markets, turns out to be another factor benefiting the risk-sensitive Aussie.

The US Dollar (USD), on the other hand, struggles to attract any meaningful buying in the wake of bets for bigger interest rate cuts by the Federal Reserve (Fed). This provides an additional boost to the AUD/USD pair and remains supportive of the move up. That said, persistent worries about an economic downturn might hold back traders from placing aggressive bullish bets around the China-proxy AUD. Traders might also prefer to wait on the sidelines ahead of this week's release of US inflation figures.

The US Producer Price Index (PPI) is due on Tuesday, which will be followed by the Consumer Price Index (CPI) on Wednesday. This week's US economic docket also features the release of monthly Retail Sales figures. The crucial data will influence market expectations about the Fed's future policy decisions, which, in turn, will drive the USD demand and provide a fresh directional impetus to the AUD/USD pair. In the meantime, the fundamental backdrop favors bulls and supports prospects for additional gains.

RBA FAQs

What is the Reserve Bank of Australia and how does it influence the Australian Dollar?

The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.

How does inflation data impact the value of the Australian Dollar?

While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.

How does economic data influence the value of the Australian Dollar?

Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.

What is Quantitative Easing (QE) and how does it affect the Australian Dollar?

Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.

What is Quantitative tightening (QT) and how does it affect the Australian Dollar?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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