AUD/USD struggles around 0.6600 as US Dollar trades firmly
- AUD/USD faces pressure above 0.6600 as the US Dollar soars amid French political crisis.
- The Fed is expected to cut interest rates further by 50 bps this year.
- Steady Australian job market remains a drag on RBA dovish expectations.
The AUD/USD pair struggles to extend its upside above the key resistance of 0.6615 during the European trading session on Monday. Earlier in the day, the Aussie pair recovered sharply after a weak opening near 0.6585.
The pair faces slight selling pressure as the safe-haven demand of the US Dollar (USD) increases sharply amid political uncertainty in France. France’s new Prime Minister Sebastien Lecornu announces resignation after appointing his cabinet.
During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, surges 0.8% to near 98.45.
On the domestic front, Washington faces the risk of mass lay-offs amid the government shutdown. On Sunday, US President Donald Trump told reporters, "It’s taking place right now," after he was asked when the White House would begin lay-offs, Reuters reported.
Meanwhile, firm Federal Reserve (Fed) dovish expectations are also expected to be a drag on the US Dollar’s outlook. According to the CME FedWatch tool, there is an 84% chance that the Fed will reduce interest rates by 25 basis points (bps) in each of its two policy meetings remaining this year.
Though investors have underpinned the Australian Dollar (AUD) against the US Dollar, it is outperforming its other peers as traders doubt that the Reserve Bank of Australia (RBA) will cut interest rates again in the remainder of the year. RBA dovish bets have eased as Australian job market remains upbeat.
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.
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.
