Australian Dollar saw some losses on Tuesday, eyes on Powell's words and RBNZ decision
- AUD extended its decline on Tuesday against the USD.
- RBA’s hawkish position on policy provides noticeable support to the Aussie.
- Markets are digesting Jerome Powell’s cautious words, which gave the USD some traction.
- Focus this week will be the reveal of US inflation figures on Thursday.
The Australian Dollar (AUD) racked up more losses on Tuesday against the USD, which managed to gain some ground due to cautious remarks by Jerome Powell. Nevertheless, the pair still maintains a strong position at its highest level since January. The downside for the Aussie appears to be limited, due to strong data reported last week and the continued hawkish stance of the Reserve Bank of Australia (RBA).
The RBA is likely to be one of the last G10 countries' central banks to initiate rate cuts, which should continue to work favorably for the AUD through monetary policy divergence.
Updated daily market movers: AUD sees further losses, attention on Powell and US CPI
- Fed Chair Jerome Powell's Semiannual Monetary Policy Report to Congress saw him acknowledging progress on inflation but that the bank needs data to embrace cuts.
- US CPI is set to be reported on Thursday. The headline is expected to decrease slightly to 3.1% YoY, while the core is anticipated to remain steady at 3.4% YoY.
- This week holds no significant events on Australia's calendar, and the AUD is projected to retain its gains against its competitors as long as the RBA sustains its hawkish stance.
- On the Fed's side, there's now less than a 10% chance of a cut for their next meeting at the end of July and around an 80% chance for a cut in September, contingent on future data.
- On the RBA's side, there’s almost a 50% chance of a September or November rate hike, with the market seriously betting on it.
Technical analysis: AUD/USD’s struggle continues, but further correction possible
The AUD/USD continues on its losing path, marking a two-day losing streak on Tuesday, but the overall outlook remains positive. This is backed by deep positive territory on the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD). Having reached near-highs since January, the pair's performance last week has signaled a bullish outlook, but buyers seem to be booking profits.
The next bullish targets are set at 0.6730 and 0.6750, while support levels to keep an eye on are at 0.6670, 0.6650 and 0.6630.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
