AUD/USD struggles to extend upside above 0.6550 ahead of US PCE inflation data
- AUD/USD sees slight selling pressure above 0.6550 ahead of the US PCE inflation data for July.
- Traders are confident that the Fed will cut interest rates in September.
- The next trigger for the Australian Dollar will be the Caixin Manufacturing PMI data for August.
The AUD/USD pair struggles to extend its upside above the key level of 0.6500 during the European trading session on Friday. The Aussie pair trades broadly stable after a three-day winning streak, with investors awaiting the United States (US) Personal Consumption Expenditure Price Index (PCE) data for July, which will be published at 12:30 GMT.
Investors will closely monitor the US inflation data as it will influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook. Economists expect the US core PCE inflation, which is the Federal Reserve’s (Fed) preferred inflation gauge, to have risen at a faster pace of 2.9% on year against 2.8% in June, with the monthly figure rising steadily by 0.3%.
According to the CME FedWatch tool, there is an 85% chance that the Fed will reduce interest rates by 25 basis points (bps) to 4.00%-4.25% in the policy meeting in September.
On Thursday, Fed Governor Christopher Waller also argued in favor of reducing interest rates in the September meeting amid growing labor market concerns. “I would support a 25 bps cut at Fed’s September meeting and anticipate additional rate cuts over the next 3–6 months as downside risks to the labor market have increased,” Waller said at the Economic Club of Miami.
In Australia, Private Sector Credit for July has come in stronger than projected. On Month, the data rose at a faster pace of 0.7%, compared to expectations and the prior reading of 0.6%. Higher credit by the private sector indicates an improvement in business sentiment.
Going forward, the Australian Dollar (AUD) will be influenced by the Caixin Manufacturing PMI data for August, which is scheduled for Monday, given that the Australian economy relies heavily on its exports to China.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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