Australian Dollar approaches two-month highs at 0.7088 with RBA decision on tap
- AUD/USD consolidates gains above 0.7050, with two-month highs of 0.7088 at hand.
- The RBA is widely expected to leave its benchmark interest rate unchanged at 4.35% on Tuesday.
- The US Dollar remains depressed amid lower hopes of near-term Fed rate hikes.
The Australian Dollar (AUD) holds gains, in the mid-range of the 0.7000s against the US Dollar (USD) on Monday, with two-month highs of 0.7088 at hand. The Aussie is capitalising on the US Dollar’s weakness, as hopes of Federal Reserve (Fed) rate hikes wane. Investors, however, remain wary of placing large directional bets ahead of the release of the Reserve Bank of Australia´s (RBA) monetary policy decision, due on Tuesday.
Markets are widely expecting the RBA to leave its benchmark interest rate unchanged at the current 4.35% level. The focus, thus, will be on the policy statement and Governor Bullock's press release to assess the chances of further rate hikes in the coming months. Recent inflation figures showed that the RBA Trimmed Mean CPI accelerated to a 3.6% yearly rate in June, up from 3.5% in May, but below market expectations of 3.7%, which cast some doubts about the bank’s incentives to tighten its monetary policy further after having hiked rates three times already in 2026.
The US Dollar, on the other hand, remains on the defensive, still weighed by last Friday's Nonfarm Payrolls disappointment. Data from the US Bureau of Labor Statistics showed a 23K decline in net employment in July, undershooting expectations of an 80K increase. Beyond that, the BLS revised the previous two months' job gains sharply lower, dampening hopes of immediate Fed rate hikes further. Futures markets are now pricing a 44% chance of an interest rate hike in September, from 67% in the previous week.
Against this background, FX Analysts at Societe Generale highlight that AUD/USD “defended the 200-DMA in June and has since formed a series of higher highs and higher lows on the daily time chart, highlighting the onset of a short-term uptrend.” Looking ahead, the experts affirm that “the next objectives could be located at projections of 0.7120 and the June highs near 0.7200/0.7275,” while cautioning that “the 200-DMA (currently near 0.6920) may act as an important support.”
RBA FAQs
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.
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.
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.
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.
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
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
