Australian Dollar holds positive ground above 0.7050 as RBA delivers hawkish hold on rates
- AUD/USD gains ground to near 0.7070 in Wednesday’s early Asian session.
- The RBA kept the OCR on hold at 4.35% at the June monetary policy meeting on Tuesday.
- Fed is anticipated to leave the rates unchanged on Wednesday.
The AUD/USD pair trades with mild gains around 0.7070 during the early Asian trading hours on Wednesday. The Australian Dollar (AUD) strengthens against the US Dollar (USD) after the Reserve Bank of Australia (RBA) delivered a hawkish hold on rates on Tuesday.
As widely expected, the RBA decided to hold the Official Cash Rate (OCR) at 4.35% after concluding its June monetary policy meeting. This is a pause following three consecutive 25 basis points (bps) rate hikes earlier this year.
Despite leaving the interest rate unchanged, the board members signaled that further rate hikes might be necessary to achieve its goals. Members added that the Australian central bank remains “focused on ensuring that inflation does not become embedded once the impulse from higher oil prices has passed through.”
Positive developments surrounding the US-Iran peace agreement might contribute to the Aussie’s upside as a riskier asset. US Vice-President JD Vance said on Tuesday that US President Donald Trump may decide to release a preliminary deal to end the war with Iran before Friday, after the US president said the agreement had already been signed.
Meanwhile, Iran’s Foreign Minister Seyed Abbas Araghchi confirmed a new round of talks on reaching a final peace deal with the US would begin in Switzerland the same day.
The Fed policy meeting will be in the spotlight on Wednesday. The US central bank is likely to keep its key interest rate unchanged in the range of 3.50% to 3.75% as it remains in "wait-and-see" mode. Traders will closely monitor the press conference and take more cues about how new Fed chair Kevin Warsh will lead the US central bank into its next era.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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