Australian Dollar backs off ahead of key Judo PMIs
- Australian Dollar has lost some momentum in recent sessions despite RBA’s hawkish hold.
- Treasury yields benefit US Dollar on Thursday.
- Australian economy's next crucial data set will be released in Friday's session with the June Judo PMI figures from Australia.
In Thursday's session, the Australian Dollar (AUD) met with some losses against its peers. This development follows the AUD/USD’s retreat after two consecutive sessions of gains heading toward 0.6670, ultimately succumbing to higher US Treasury yields that boost the USD.
Signs of fragility are emerging in the Australian economy, however, persistently high inflation is causing the Reserve Bank of Australia (RBA) to postpone potential rate cuts, potentially mitigating further losses. The RBA is primed to be among the last G10 nations to initiate rate cuts, a situation that might perpetuate the Aussie's gains.
Daily digest market movers: Australian Dollar consolidates RBA gains, eyes on PMIs
- RBA once more demonstrated a hawkish hold, retaining the official cash rate (OCR) at 4.35% without committing to a particular future stance, echoing their phrase “the Board is not ruling anything in or out.”
- In her subsequent press conference, Governor Bullock reiterated the Board’s discussions about potential rate hikes and dismissed considerations of rate cuts in the near term.
- In light of this, the RBA expressed readiness to do "what is necessary" to guide inflation back within target parameters.
- Market anticipates nearly 50 bps of easing by December 2025, while rate hikes in August and September are yet to be ruled out.
- Further indications will come from upcoming preliminary data from Australia’s Judo Bank Purchasing Managers Index (PMI) set for release on Friday.
- Expected signs of revival in the Australian economy might command the RBA to delay rate cuts, potentially uplifting the Australian Dollar against the USD.
- US Treasury yields saw a considerable rise, with gains exceeding 1%. The 2-year, 5-year and 10-year rates stood at 4.74%, 4.29%, and 4.27%, respectively, and seem to be driving demand toward the USD.
Technical analysis: Bullish signals ease off, confirmation still on hold
On the technical front, indicators are losing some intensity despite the recovery of the Relative Strength Index (RSI), which has surged back above 50, while the Moving Average Convergence Divergence (MACD) charts a fresh green bar.
However, it's worth mentioning that these are still buy signals. For a more solid buying confirmation, the AUD/USD pair needs to fully anchor itself above the 20-day Simple Moving Average (SMA). In that sense,sellers might retest the support in the next few sessions to test its strength.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
