Australian Dollar mildly down ahead of US inflation data
- Despite minimal losses, the AUD/USD remains at its highest level since January, just below 0.6740.
- RBA’s hawkish interest rate stance supports the Aussie.
- Week’s highlight will be inflation figures from the US on Thursday.
The Australian Dollar (AUD) saw some losses on Monday against the USD, which still remains weak after last week's data, which fueled dovish expectations for the Federal Reserve (Fed). With the pair maintaining its highest level since early January, the upside for the Aussie is limited by strong data reported last week along with the Reserve Bank of Australia’s (RBA) hawkish stance.
The RBA appears set to be one of the final G10 countries' central banks to initiate cuts, which should continue to support AUD as it might benefit from monetary policy divergences.
Daily digest market movers: AUD benefited by monetary policy divergences, eyes on US CPI
- US CPI will be reported on Thursday. The headline is expected to decrease slightly to 3.1% YoY, while the core is predicted to remain steady at 3.4% YoY.
- Potential easing by the Fed, juxtaposed with the likely extended restrictive stance of the RBA, could bolster the AUD/USD in coming months.
- Still, concerns about slow momentum of Chinese economy may hinder a sustained recovery of the Australian currency.
- This week doesn't offer any major events on Australia's calendar, and the AUD is forecast to hold its gains against its competitors as long as the RBA maintains its hawkish stance.
- On the Fed's side, there's a 70% chance of a September rate cut, contingent on future data with markets seriously betting on a hike this year by the RBA.
Technical analysis: AUD/USD concedes some ground, further correction possible
The AUD/USD lost ground on Monday, but the overall outlook is positive, backed by deep positive territories on the technical indicators Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD). With the pair securing a four-day winning streak and reaching its highs since January, the bulls confirmed a bullish outlook last week.
Nevertheless, traders should pay attention to possible overbought conditions, suggesting a slight correction might be imminent.The next bullish targets are at 0.6750 and 0.6780, while support levels to monitor 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.
