Australian Dollar on the red as investors await RBA's decision
- AUD/USD slips amid ongoing bearish sentiment, approaching key support level.
- Economic weakness in Australia intensifies rate-cut expectations for the RBA.
- Technical indicators suggest a potential correction, but bearish momentum remains dominant.
The Australian Dollar (AUD) encountered some selling pressure against the US Dollar (USD) on Monday, declining by 0.50% to 0.6480. During the European session, it fell to its lowest since November 2023 around 0.6350 as risk-off flows dominated the markets, while investors await Tuesday's Reserve Bank of Australia (RBA) decision for further direction.
Despite persistent high inflation, recent data has pointed to weaknesses in the Australian economy. This has prompted markets to shift their expectations from a potential rate hike by the RBA to a rate cut by year-end. The RBA is expected to keep rates steady at 4.35% at its meeting on Tuesday, but investors will be closely monitoring the central bank's policy guidance for any hints of a more dovish stance.
Daily digest market movers: Aussie down as markets digest PMIs ahead of RBA
- Australia's July services and composite PMIs were weaker than expected, with the composite reading falling below 50 for the first time since January.
- The Melbourne Institute Monthly Inflation Gauge showed a decline in inflation to within the RBA's target band.
- The RBA is expected to maintain a neutral policy stance despite inflation remaining above its target range.
- The highlight will be that the RBA will publish new sets of forecasts in its Statement on Monetary Policy, which will guide markets on the next interest rate bets.
AUD/USD technical analysis: Bears continue in command, correction still possible
The AUD/USD pair continues to trade beneath its key Simple Moving Averages (20, 100 and 200-day SMAs), indicating a prevailing bearish sentiment. The Relative Strength Index (RSI) also suggests bearishness, with values hovering between 30-37 in recent sessions. The Moving Average Convergence Divergence (MACD) maintains red bars, further reinforcing the negative momentum.
However, the AUD/USD pair has found some support near the 0.6480 and 0.6350 levels, which could potentially act as a temporary floor. Resistance is anticipated around the 0.6560-0.6570 zone, where selling pressure has previously capped rallies.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
