AUD/USD recovers early losses as US Dollar struggles to extend upside
- AUD/USD recovers its early losses as the US Dollar’s upside move seems to peak out.
- Investors await the Fed Powell’s speech for fresh cues on the monetary policy outlook.
- Australia’s Monthly CPI is expectedly to have risen steadily by 2.8%.
The AUD/USD pair claws back its early losses and rebounds to near 0.6590 during the European trading session on Monday. The Aussie pair bounces back as the US Dollar (USD) struggles to extend its three-day winning streak, with investors awaiting Federal Reserve (Fed) Chair Jerome Powell’s speech on Tuesday.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades marginally lower to near 97.55.
The US Dollar traded firmly in the last few days, following the monetary policy announcement by the Fed on Wednesday, in which it reduced interest rates by 25 basis points (bps) to 4.00%-25%. The Fed also signaled two more interest rate cuts in the remainder of the year.
On Tuesday, investors will focus on Fed Powell’s speech to get more cues on the monetary policy meeting. Market participants would also like to know about whether the Fed will continue reducing interest rates even as inflationary pressures remain well above the central bank’s target of 2%.
Meanwhile, the next trigger for the Australian Dollar (AUD) will be the Monthly Consumer Price Index (CPI) data for August, which will be published on Wednesday. The inflation data is expected to have grown steadily at an annual pace of 2.8%. Signs of inflationary pressures remaining persistent could restrict the Reserve Bank of Australia (RBA) from reduce interest rates further.
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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