Australian Dollar performed strong against its peers as markets digests RBA's hawkish hold
- AUD/USD recovered much of its previous losses in Tuesday’s session, following RBA decision.
- USD started the week softly, and its declines extended following weak Retail Sales figures.
- If the Fed and RBA policies diverge, the Aussie might see further gains.
The Australian Dollar (AUD) witnessed sizable gains against the US Dollar (USD) following Tuesday’s Reserve Bank of Australia (RBA) meeting, which concluded with a hawkish hold.
Despite the underlying weakness in the Australian economy, stubbornly high inflation has prompted the RBA to postpone rate cuts. On the US side, disinflation signals have boosted confidence in a September interest rate cut by the Federal Reserve (Fed).
Daily digest market movers: Australian Dollar buoyant after RBA’s hawkish hold
- Reserve Bank of Australia, as widely expected, left the cash rate static at 4.35% and reiterated that “the Board is not ruling anything in or out.”
- Furthermore, Governor Bullock confirmed that the board discussed rate hike options with a rate cut not being contemplated at this time.
- Resolute tone surrounding Australia's inflation backdrop implies that threshold for policy easement remains high.
- RBA disclosed that "inflation remains above target and proves persistent" and reiterated that "the Board anticipates it will be a while still before inflation is sustainably within the target range."
- On the US front, the US Census Bureau released that Retail Sales, a crucial measure of household spending, grew at a slower-than-anticipated pace in May of 0.1% against the projected 0.2%.
- Slower Retail Sales growth might create significant pressure on the US Dollar, as it is set to bolster investors' belief in the gradual disinflation process.
- CME FedWatch Tool indicates higher probabilities of interest rates starting to decrease from the September meeting, with one or more rate cuts implied in November or December.
Technical analysis: Bullish signals gain traction, pending confirmation
The Relative Strength Index (RSI) has now risen above 50, signifying a shift in momentum. Concurrently, the Moving Average Convergence Divergence (MACD) registers shrinking red bars, hinting at declining selling pressure and a potential reversal.
However, the short-term outlook remains negative unless buyers consolidate above the 20-day Simple Moving Average (SMA) now set at 0.6640. As the AUD/USD struggles with the 20-day SMA, investors should continue to monitor the region of 0.6560-0.6550, where the 100-day and 200-day Simple Moving Averages (SMAs) meet. That support level might be retested in the upcoming sessions if bulls fail to confirm their surge.
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
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
