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Australian Dollar remains soft ahead of eventful Friday

  • AUD/USD experienced a drop, adjusting to 0.6950, because of a USD recovery.
  • Strong Australian PMIs might limit the pair's downside.
  • The persistent hawkish views of the RBA keep backing the Aussie versus its peers.

On Thursday, the AUD/USD is seeing a moderate decline, retracing some of the gains after the approximately 2% rally from the last sessions. The narrative of monetary policy divergence between the Federal Reserve (Fed), contemplating a less assertive approach toward interest rates, and the steadfast position of the Reserve Bank of Australia (RBA) preserves the push on the pair, putting the Aussie ahead of the Greenback. However, the USD staged a recovery on Thursday ahead of Friday’s speech from Jerome Powell at the Jackson Hole Symposium.

In spite of a mixed Australian economic outlook, underlined by strong August PMIs, and the RBA's hawkish stance ascribed to high inflation, markets are anticipating a minimal 25 basis points of easing for 2024, upholding a solid stand for the Aussie.

Daily digest market movers: Aussie's rally slackens despite strong PMIs, policy divergences to limit the losses

  • Softening US labor market data and soft S&P PMIs suggest that the Fed may follow a less assertive footing, leading to a potential depreciation of the USD.
  • In contrast, preliminary August PMIs from Australia exhibit a stout picture of the economy.
  • Manufacturing rose to 48.7 in contrast to 47.5 in July, Services scaled to 52.2 versus 50.4 in July, and the composite climbed to 51.4 in comparison to 49.9 in July. This development corroborates the RBA's hawkish policy disposition.
  • Despite promising Australian data, the path of the pair will continue to be guided by incoming data from both countries.
  • In the meantime, markets are extremely confident about a September cut by the Fed in September.

AUD/USD technical outlook: AUD/USD upsurge prevails with lower but firm momentum

Technical analysis suggests that the AUD/USD pair has persisted in its upward trajectory over the sessions, with a significant volume increase reinforcing a positive outlook. However, the price action suggests a consolidation of those gains.

The Relative Strength Index (RSI), which showcases market momentum, has risen slightly from previous sessions. Currently, at 59, the RSI suggests a slightly bullish sentiment and ongoing bullish pressure beneath the overbought level of 70, which was hit earlier in the week. Furthermore, the Moving Average Convergence Divergence (MACD) indicator aligns with this bullish tone with steady green bars.

Indeed, the AUD/USD pair appears to have consolidated above the 0.6700 support level, which now serves as a significant area for the pair. The immediate critical resistance comes in around the recent high of 0.6760-0.6800.

Interest rates FAQs

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.

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.

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.

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

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

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