Australian Dollar tallies weekly losses, RBA hawkish stance to limit the downside

AUD/USD registered a significant drop on Friday, slipping below 0.6700.
Employment data continues to shape possible RBA and Federal Reserve decisions.
The Aussie’s downside is limited by the hawkish RBA stance which hasn’t shown signs of embracing cuts.

Patricio Martín FXStreet

In Friday's session, The Australian Dollar (AUD) saw considerable losses against the USD, falling by 0.30% to 0.6690. This slump in the AUD/USD exchange rate is mostly due to the strengthening of the US Dollar (USD) amid increased aversion to risk. However, higher-than-expected Employment Change figures from Australia, indicating a tight labor market, could curb the AUD's downside by raising concerns over a potential interest rate hike from the Reserve Bank of Australia (RBA) and hence limit the pair’s downside.

Despite some signs of fragility in the Australian economy, persistently high inflation is prompting the RBA to delay rate cuts, potentially limiting any further decline in the AUD. The RBA remains among the last central banks within the G10 countries expected to begin rate cuts, a commitment that could bolster the AUD's position.

Daily digest market movers: Aussie struggles as markets assess employment figures

On a quiet Friday, markets continue to digest Thursday’s employment figures from Australia which came in mixed.
It was announced a substantial 50.2K increase in employment changes, soaring beyond earlier market forecasts of 20K and May's 39.5K record.
On the negative side, the Unemployment Rate rose marginally from 4.0% to 4.1%, which might provide some relief to the RBA's hawkish stance.
The market currently predicts roughly a 50% chance of the RBA hiking either in September or November.
Conversely, the chance of the Federal Reserve implementing a rate cut in September stands at approximately 90% according to the CME FedWatch tool.

AUD/USD Technical analysis: AUD/USD falls and concedes the 20-day SMA

After early July's sharp gains, technical indicators such as the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) have signaled weakening momentum, suggesting the pair has entered a correction period. On Friday, the pair gave up the crucial support of the 20-day Simple Moving Average (SMA) at 0.6700 which should flash some concerns to trades.

It appears the pair may fluctuate between the 0.6650-0.6780 range in the following sessions as the market adjusts.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

Author

Patricio Martín

FXStreet

Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.

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