Australian Dollar trades with modest gains, awaits Fed rate decision
- The Australian Dollar gains ground as the RBA is expected to keep higher rates for longer.
- The Australian Dollar may see limited upside due to softer-than-expected inflation data from its trade partner, China.
- The US Dollar remains strong as the Fed is expected to keep rates steady in the range of 5.25%-5.50% on Wednesday.
The Australian Dollar (AUD) edges higher on Wednesday, possibly supported by the hawkish sentiment surrounding the Reserve Bank of Australia (RBA) to maintain higher rates this year. Last week, RBA Governor Michele Bullock indicated that the central bank is prepared to increase interest rates if the Consumer Price Index (CPI) does not return to the target range of 1%-3%, according to NCA NewsWire.
The Australian Dollar may struggle due to softer-than-expected Chinese consumer inflation data released on Wednesday. China’s CPI increased by 0.3% year-over-year in May, missing expectations for a 0.4% rise. Chinese CPI inflation decreased by 0.1% MoM versus April’s 0.1% increase.
The US Dollar (USD) remains strong, bolstered by robust US jobs data for May. This development has reduced the odds of two Federal Reserve (Fed) interest rate cuts in 2024. The CME FedWatch Tool indicates that the likelihood of a Fed rate cut in September by at least 25 basis points has decreased to 52%, down from 67% a week earlier.
Investors adopt caution ahead of the Federal Reserve's policy decision, and key US inflation data are expected later in the North American session. The Fed is anticipated to keep interest rates steady in the range of 5.25%-5.50% as it aims to curb inflation toward its 2% target. The US headline and core CPI figures for May are estimated to show year-over-year increases of 3.4% and 3.5%, respectively.
Daily Digest Market Movers: Australian Dollar inches higher due to hawkish RBA
- China’s Producer Price Index (PPI) decreased by 1.4% year-over-year in May, compared to the expected decline of 1.5% and April's 2.5% fall. This marked the 20th consecutive month of contraction in factory-gate prices, but it was the smallest decline since February 2023.
- Australian Treasurer Jim Chalmers stated that the visit of China's Premier Li Qiang to Australia is an important opportunity. Chalmers noted underlying weaknesses in China's economy and expressed that he does not expect China's economy to recover immediately.
- Australia's NAB Business Confidence index dropped to -3 index points in May, marking the lowest figure in six months and turning negative for the first time since last November. Meanwhile, Business Conditions fell to 6 index points, slightly below the long-run average.
- On Tuesday, National Australia Bank (NAB) Chief Economist Alan Oster commented, “There are warning signs on the outlook for growth but at the same time reasons to be very wary about the inflation outlook, and they expect the RBA to keep rates on hold for some time yet as they navigate through these contrasting risks,” as per the official transcript.
- Rabobank suggested in its report that the Federal Reserve may cut rates in September and December, more likely because of a deteriorating economy than because of progress on inflation. This is because they think that the US economy is entering a stagflationary phase with persistent inflation and an economic slowdown that is likely to end in a mild recession later this year.
Technical Analysis: Australian Dollar moves above 0.6600
The Australian Dollar trades around 0.6610 on Wednesday. Analysis of the daily chart indicates a neutral bias for the AUD/USD pair as it consolidates within the horizontal channel pattern. The 14-day Relative Strength Index (RSI) is positioned slightly below the 50 level. A further movement may suggest a clear directional trend.
Immediate support region is identified around the 50-day Exponential Moving Average (EMA) at 0.6600, which is aligned with the lower boundary of the horizontal channel. A break below the latter could put pressure on the AUD/USD pair, pushing it toward the throwback support at 0.6580.
On the upside, the AUD/USD pair could explore the region around the upper threshold of the horizontal channel around the level of 0.6690, followed by the psychological level of 0.6700 and May’s high of 0.6714.
AUD/USD: Daily Chart
Australian Dollar price today
The table below shows the percentage change of the Australian Dollar (AUD) against listed major currencies today. The Australian Dollar was the weakest against the Canadian Dollar.
| USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
| USD | -0.04% | -0.01% | -0.06% | -0.13% | 0.10% | -0.01% | -0.05% | |
| EUR | 0.04% | 0.03% | -0.03% | -0.09% | 0.15% | 0.02% | -0.01% | |
| GBP | 0.01% | -0.03% | -0.06% | -0.13% | 0.11% | -0.01% | -0.05% | |
| CAD | 0.07% | 0.03% | 0.06% | -0.06% | 0.17% | 0.05% | 0.03% | |
| AUD | 0.13% | 0.09% | 0.12% | 0.06% | 0.23% | 0.12% | 0.08% | |
| JPY | -0.11% | -0.16% | -0.12% | -0.19% | -0.24% | -0.11% | -0.17% | |
| NZD | 0.00% | -0.03% | 0.01% | -0.05% | -0.12% | 0.12% | -0.01% | |
| CHF | 0.05% | 0.01% | 0.05% | -0.01% | -0.07% | 0.15% | 0.04% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
Author
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
