AUD/USD stays in tight range near 0.6550 ahead of Aussie Inflation and Fed policy
- AUD/USD trades back and forth around 0.6550 amid a focus on multiple Australian/US macroeconomic events.
- Inflation in Australia is expected to have risen steadily by 1%.
- The Fed is seen leaving interest rates unchanged, with a dovish guidance.
The AUD/USD pair continues to trade sideways around 0.6550 in Tuesday’s European session. The Aussie asset consolidates as investors have sidelined ahead of the Aussie Q2, the monthly Consumer Price Index (CPI) for June, and the interest rate decision by the Federal Reserve (Fed), which are scheduled for Wednesday.
Market sentiment favors risky assets on expectations that the Fed will deliver dovish guidance on interest rates, leaving them unchanged in the range of 5.25%-5.50%. S&P 500 futures have posted decent gains in London trading hours. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades flat near 104.60. 10-year US Treasury yields edge lower to near 4.17%.
Investors see Fed Chair Jerome Powell acknowledging progress in inflation and its return towards the path of 2% on behalf of policymakers in the monetary policy statement. Fed Powell is also expected to highlight concerns over the United States (US) labor market strength.
In today’s session, the US JOLTS Job Openings data for June will be in the spotlight, a key measure of labor demand that will indicate a change in the number of job vacancies posted by employers. The economic data is expected to show Job Openings were lower at 8.03 million from the former release of 8.14 million.
Meanwhile, the Australian Dollar (AUD) will be guided by the inflation data. Price pressures in the second quarter are estimated to have grown steadily by 1.0%, with the annualized figure accelerating to 3.8% from the prior release of 3.6%. Investors will also focus on the monthly Retail Sales data for June, which is estimated to have grown at a slower pace of 0.1% from May’s reading of 0.6%. The economic data will indicate whether market speculation that the Reserve Bank of Australia (RBA) will hold interest rates at their current level for the entire year is appropriate.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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